Sofia office space market in the second quarter, April-June 2017

The office real estate market has seen another active quarter with increase in take-up, stable rents and high development appetite. Office jobs growth supported demand of prime office space. IT and BPO companies remain the major source of demand in Sofia and the secondary cities.

Office space take-up in Sofia recorded more than 60 per cent y-o-y increase in the second quarter of 2017, reaching 53,971 sq. m. The leasing volume for the half-year totaled 85,638 sq. m which is 55% growth compared to the same period in 2016. The market is driven mainly by expanding IT and BPO companies which generated about 70% of the demand in the Class A market segment. The financial and pharmaceutical sectors are also active, aiming mostly at consolidating their office space. Mirroring these processes, the second quarter was marked by several notable leases.

Relocations are also marked trend, resulting in slight improvement of the occupancy in the prime segment.

In general, the vacancy rate slightly decreased in the second quarter, reaching 9.3 per cent. However, further decline is not expected since the strong development activity is forecasted to increase the availability. Investment focus

After a significant increase in take-up in H1 2017 positive economic expectations bode well for the office market over the next quarters. The trend should encourage transaction activity.

Sofia office market since the beginning of the year

The office space market in Sofia registered a significant increase since the beginning of the year due to increased activity and increased business endeavors. Strong performance is also supported by robust economic fundamentals – 3.4% GDP growth over the past year. The reduction in unemployment also speeds up the demand for office space and ensures the stability of the segment.

The occupancy of offices for the first quarter of this year is 43% higher than a year earlier. In over 60% of the deals, the key operating industries are IT (high technology) and BPO (outsourcing).

In the first quarter of this year, the volume of office space available is about 1,761 million square meters, according to their MBL and Forton reports. A total of 305,000 square meters are in the process of active construction. Frozen office projects are down to 105,000 square meters.

The decline in office space is also continuing, as in the first quarter of 2017 they are only 9.1%. Less than half of these are in Class A office buildings. The free space for Class A and B offices is about 160,500 square meters. Reducing vacancies is expected to continue because new sites are scheduled to be commissioned in the second half of the year.

Rental levels are stable. The net utilized area in the first quarter is 17 000 square meters.

The average bid prices for Class A offices for the first quarter remain within the range of 12 to 14 euro, depending on the location and area. The volume of offices under construction will continue to grow. Demand will probably be around the average volume observed over the past few years. It is also possible to expect a slight increase in prices per square meter.

Experts expect that the second half of the year is expected to remain stable. The mid-term forecast of specialists is that strong demand and scarcity of premium spaces will move the office market this year as well.

State of the office market and future development

A healthy occupier demand kept Sofia’s office market buoyant in 2016. The IT and BPO industries remained the biggest source of leasing activity, in line with the expectations.

On the supply side, a limited number of new completions were registered and the shortage of quality space is still a challenge. This imbalance resulted in prevailing share of the preleases in 2016, pushing rents up in the prime segment. However, the revival of development activity will partially rebalance the market in the present year.

SUPPLY

With only 22,300 sqm new completions the last quarter of 2016 met the expectations for moderate increase of the office supply in Sofia.

Due to a number of delayed completions, the office stock expanded by only 32,200 sqm in 2016, or just 2 per cent year-on-year. Moreover, the new supply hardly responded the requirements of larger tenants since most of the buildings offer less than 10,000 sqm of GLA. With these deliveries the total stock of Class A and B space in Sofia reached 1,611,403 sqm* at the year-end.

However, the shortage of high standard offices will be partly overcome in 2017 with the scheduled delivery of more than 160,000 sqm new leasable space.

About 50 percent of the expected space has been already pre-let or is currently under negotiation.

* Forton undertook full revision of Sofia class A and B office stock in 2016 in order to update its database. Now, the company monitors vacancy rate and tenant mix changes in office buildings or mixed-use projects with prevailing office space completed after 2002 or refurbished. Our target are buildings with above 2,000 sqm GLA.

Reflecting the strong tenant interest, total volume under construction rose to 298,000 sqm in the fall of 2016. The included projects are scheduled for completion by 2020.

DEMAND

Annual take-up reached 135,407 sqm in 2016, about 7 per cent over the previous year. Take-up in the fourth quarter amounted to 30,465 sqm, similar to Q4 2015, indicating stable leasing activity.

About 60 per cent of the occupier activity throughout the year came from the IT and BPO industry. Shared service activities remain in dominant position on the office market, together with traditional tenants, such as pharma and financial sectors.

Mirroring the shortage of prime space, the share of preleases is relatively high, accounting for 41 per cent of the total take-up in 2016. In confirmation of this trend, high-standard office buildings such as SPS Tower (8,400 sqm GLA) obtained use permit with almost 80 per cent pre-let space. Epam and Cargill are among the main tenants. Kambanite Green Offices, which was the largest completion in 2016, has been 70 per cent pre-let, as well.

Renegotiations were the second largest group of agreements on the leasing market in 2016 with 22% of the total volume, followed by the expansions. The vacancy rate continued to decrease, dropping down to 10 per cent in the fourth quarter of 2016. The vacancy of the Top 15 office buildings slightly decreased to 2 per cent.

Outside Sofia, Plovdiv and Varna registered moderate volume of office leases, accounting for less than 5 per cent of the market. However, further expansion of IT and BPO companies is expected to underpin the office markets in secondary cities.

RENTS

The large share of preleases kept prime rents in Sofia stable in 2016. However, the revival of development activity will maintain the offer rates at €13.00-13.50/sqm/month in the middle term. Strong demand supports rates in the range €8.00-10.00/sqm/month for class A properties in Plovdiv.

INVESTMENT FOCUS

Strong economic fundamentals and well performing leasing market provide grounds for large transactions with prime office projects. The investors’ focus remains on good quality income-producing assets. Following the decrease of prime yields in 2016, now the rate is stable at 8 per cent.

TRENDS AND FORECASTS

Volumes of office construction increase underpinned by the strong tenant demand;

Rents are likely to remain stable over 2017, having already grown;

Prime yields are stable, following the slight decrease in 2016.

A new companies tenants at Crystal Business Center

It is pleasure for us to inform you that the company Trade 24 has joined to the tenants at Crystal Business Center. The company, established in 2007, is a leading global provider of online forex and CFD trading services. The other new Tenant is Internet Securities Bulgaria. Also known as ISI Emerging Markets, it is part from the american company Internet Securities Inc., incorporated in 1994. The company provides specialized financial and economic information about over 100 developing markets.

Tendencies in renting office- spaces

According to the information from Sollers, published in economy.bg, by the last quarter of 2014 there is a tendency in depletion of quality offices in Sofia, which is based on the lack of constructions and increasingly interest from the tenants in that kind of offices. According to research made by consulting company Forton, the same tendency is actual by the second quarter of 2015. As per the company, the activity of the tenants this year is with 40% higher that the last year.