Office space market overview – Q3

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.