- Rented office space increased, but vacant area reached a historic peak
- There are many new buildings, but construction activity hit a post-2016 bottom
- Relocations and renewals dominated the market in 2021
The Sofia office market was feeling ill for a while during the pandemic-marred 2020, but in the middle of 2021 it started recovering. Yet, its indicators are still showing confusion. Rented and vacant areas are growing, vacant even hitting records. At first glance, it is illogical, but there is an explanation. Last year, many new high-quality office buildings were completed - almost half of all projects. In addition, most new leases are precisely related to the relocation of existing offices without much expansion. The good news is that the immunity of the office market is strong and it is beginning to self-regulate - construction in new areas has fallen to its lowest levels in five years, an analysis by five leading property consultants shows.
The first signs of recovery in the office market in Sofia appeared in the third quarter of 2021 and the process continued until the end of the year, according to Colliers. In the second half of the year, the leases covered nearly 81-85 thousand square meters, and in the last quarter alone - between 31 and 46 thousand square meters, according to various consultants. The prevailing feeling is that the second half of the year was better than the first. Only MBL points out that a higher volume of rents was reported in the third quarter of 2021, compared to the fourth.
In general, the volume of signed contracts for renting office space in 2021 is estimated between 120 and 154 thousand square meters by various consultants. Colliers and MBL reported a 40% increase compared to the previous year, C&W Forton and JLL - a rise of 44%. For Avalant, which does not take into account newly renewed contracts, the volume of new rents in 2021 is almost twice as high compared to 2020. For JLL, it is close to the average for the last five years. C&W Forton commented that the numbers are more optimistic than in 2020, but are still below the levels of 2019. MBL also noted that the values are far from pre-pandemic levels. Many tenants have not clarified their new workplace policies but the gradual acceleration of the market is a fact and is likely to continue in 2022, they predict.
Relocations and renewals
The rental market is driven mainly by relocation transactions from older buildings to newer and better quality projects. Expansion and new businesses have a smaller share. "During the period under review, 64% of the gross leased space was due to relocations, 18% to the expansion of existing companies, 13% to contract renewals and 5% to new contractors," Colliers said.
Demand is driven mainly by a desire for optimization and consolidation - for a newer, more modern office, better rental conditions or more efficient distribution of office space, the consultants explain. The most active tenants are again IT and outsourcing companies (61%), and in second place - financial services (25%). Colliers say that new IT and outsourcing companies have a huge interest in starting operations in Bulgaria. However, whether it will materialize also depends on the labour market as well as the political and economic situation, they say.
All this leads to a low rate of net utilization of office space. In the last quarter of 2021it stood between 14 and 16 thousand square meters, according to various consultants.
"This shows that the majority of transactions in 2021 did not lead to a significant increase in tenant space. The trend was for relocations that did not lead to further expansion," Avalant said. The figure for the whole year is low, but still twice as high compared to 2020, according to MBL.
Record high free office space
The percentage of vacant office space gradually grew during the year and reached its highest point since 2015 in the last quarter. Most consultants give rates between 16% and 16.8%. MBL notes that in terms of volume, the free office space stood at a record high for the new history of the business market in Sofia. Its estimate is for 390 thousand square meters, Forton's - for 377 thousand square meters, and Avalant's - for 418 thousand square meters. Avalant also gives the highest share of vacant office space in Sofia - 20.38%. They report as vacant not only the offices for which no lease has been signed, but also those for which there are contracts, but the tenants have not yet moved in.
MBL claims that 42.5% of all vacant office space is located along Tsarigradsko Shose boulevard. However, according to Forton and JLL, the most affected are class B properties and newly built projects with less developed transport connectivity. According to Avalant, the share of vacant space in Class A offices is 21.33%, and in Class B - 18.94%. They expect that the vacancy in the A-segment will decrease in the first half of this year because some companies will move into their rented offices.
The volume of new office projects, which received Act 16 (Certificate of Commissioning) in 2021 is estimated at between 156 and 216 thousand square meters by consultants. MBL points out that this volume (192 thousand square meters according to their data) is three times larger than in 2020 when the new areas were 66 thousand square meters.
Five-year bottom in new construction
Construction activity has fallen to its lowest level since 2016. In 2022 and 2023, nearly 190 - 210 thousand square meters of new office spaces are expected to be completed. But if the horizon is extended to 2024, there will be nearly 243 - 258 thousand sq.m.
According to Avalant, 89 thousand square meters of office buildings are expected to be constructed in 2022 (and nearly 21% of this volume has already been leased). In 2023, a further 84 thousand square meters of class A office spaces ( 8% of them leased) are expected.
No official launches of office buildings were registered in the second half of 2021.
"Construction costs continue to rise and a significant part of the projects under active construction was completed in 2021. Therefore, we expect construction activity to gradually decrease, reaching levels similar to those after the financial crisis of 2008," according to MBL.
Property consultants esimate the volume of leased office space in Sofia at 2.05 to 2.56 million square meters as at the end of 2021. Most consultants report areas A and B, but Colliers, who indicate the upper limit, report also C areas. The share of Class A in total supply is nearly 73%, according to JLL, and 60% according to Avalant, which monitors only the so-called speculative areas - for rent, and does not include the buildings for own use.