The existing stock of modern office space in Sofia continued to grow, reaching 1.828 mln sq. m, following the completion of BSR Sofia 1 (phase 2) and several smaller properties, informed from MBL.
The new deliveries amounted to 41,800 sq. m., which is the highest quarterly figure since Q3 2015. Furthermore, the number of construction starts is increasing and the volume of space under construction is already 337,000 sq. m, of which ca. 250,000 sq. m. are scheduled for delivery by the end of 2018.
VACANCY
The overall vacancy rate Sofia in Q3 increased for a second consecutive quarter, from 9.4% to 10.3%. The vacant space in Class A and Class B offices amounts to 188,000 sq. m, which is up by 20,000 sq. m compared to the previous quarter. As expected, the project completions towards the end of this year are increasing and bringing new office space to the market, which will continue to push the vacany upwards. Certain attractive business areas however, due to stable demand and expected limited supply, such as the CBD or certain office building clusters, are expected to exhibit lower than average vacancy rates.
DEMAND
The take-up in Q3 2017 totaled 29,000 sq. m, bringing the year-to-date number to 82,000 sq. m. The activity was mostly concentrated in the CBD where nearly 60% of the newly leased space is located. Pre-leases accounted for 35% of the transacted space. SSC, BPO, and tech sectors accounted for most of the newly leased space with a 75% share. The quarterly aggregate net absorption for class A and B space was 21,000 sq. m. and the year-to-date figure reached 53,500 sq. m.
RENTAL RATES
The average asking rents for modern office space in Q3 2017 remained stable. The asking rents for Class A offices are mainly within the €12 – €14 per sq. m range.
Class B properties are offered on average between €6.5 per sq. m and €9.5 per sq. m. Due to the stable demand the rental levels keep their range set in the beginning of the current year. However, due to the growing number of buildings in the construction pipeline, the available space is expected to steadily rise in the next couple of years, which is likely to balance the demand and result in stable to slightly lower rental levels in the future.
ECONOMIC HIGHLIGHTS
In Q2 2017 Bulgaria GDP growth increased to 3.6% on a seasonally-adjusted annual basis. Domestic consumption grew by 4.2% and was the key driver for the positive development. The EC’s winter economic forecast for Bulgaria is for an annual GDP growth of 2.9% for 2017.
The inflation continued to slightly go up. In Q2 the Consumer Price Index (CPI) increased by 2.3%. In their winter forecast the EC expects stronger domestic demand and higher energy prices to result in 0.8% annual HICP inflation for 2017.
The unemployment rate in the end of Q2 2017 was 6.9% and the latest forecast is to average 7.1% for 2017.
As of Q2 2017, Bulgaria had Foreign Direct Investment (FDI) of €451 million, up from the 246 million recorded in Q1.
MARKET OUTLOOK
During the last couple of years Sofia office space market exhibits a rapidly growing construction activity – the project completions and new buildings obtaining building permits and breaking ground continue to rise. This brings the potential new office space deliveries for the next 3 years above 600,000 sq. m. and hence vacancy rates will continue to increase. Therefore, rental rates are expected to remain generally stable this year, but are likely to decline in the long run.
INVESTMENT ACTIVITY
The increased buy-side enthusiasm, observed on the Bulgarian real estate investment market during the first half (H1) of 2017, continued into the third quarter of the year, with retail segment being once again the main market driver.
So far this year, the total volume of transactions with income-producing properties has exceeded €700M. With more transactions in progress across all segments, 2017 may be a record year in term of overall investment turnover.