Inventory & Construction Activity:
The total stock of industrial space in Sofia as of the first half of 2023 exceeded to a little over 4.0 million sq.m ready-to-use space. Another 252,000 sq.m were under construction and expected to be completed in the following year. During H1, approximately two-thirds of the current stock was owner-occupied, while the rest was tenant-occupied.
The highest share of industrial space was located in the Eastern part of the city (41%) while the largest portion of ongoing construction activity took place in the Northern part of Sofia. Out of the ongoing projects, more than half (132,000 sq.m) were slated to be occupied by tenants rather than owners.
Demand:
Demand in the sector has been high and stable in the last couple of years compared to other commercial real estate segments, which were largely affected by the pandemic and the following economic disruptions. In order to satisfy the rising demand, for the last 3 years there has been quite active construction activity in the sector and multiple projects have been delivered on the market. Despite the large amount of newly constructed industrial space, vacancy continued to drop and net absorption continued to be stable, demonstrating that demand is strong and the sector was in very good condition.
Vacancy:
Average vacancy rate in the industrial segment has been below 3% since the second half of last year, and decreased even more in the beginning of 2023 to up to 2%, which demonstrates stable sector performance and a healthy consumer demand.
During the first half of 2023, the Eastern industrial market had the least available space to let and vacancy plunged below 1% during H1 2023. This is due mostly to the easy and quick access to two of the major highways in Bulgaria – Trakiya and Hemus.
Rental Rates:
Average rental levels in Sofia varied between € 3.90 and € 5.10 per sq.m depending mostly on location and property specifics.
While in previous periods asking rents were particularly higher in Southern and Eastern industrial zones, compared to the rest, in the first half of 2023 asking prices were becoming relatively equal in all parts of Sofia and on an upward trend, mainly due to the high demand and low vacancy rate.
A major increase was observed in the North where a couple of new modern projects with higher asking prices, affected the average rent in the region.
Investment Activity:
Inflation is on a downward trend and central bankers are unlikely to continue pursuing aggressive monetary tightening for too long. At the same time, lending terms in Bulgaria are still pretty competitive despite headlines urging cautious economic optimism. However, after some encouraging signs of investment activity (ca. €80 million in total deal volume) in 2022, the first half of 2023 failed to register any noteworthy investment deals.
Modern assets with the right mix of construction quality, amenities and accessibility are likely to always enjoy higher occupancy, rental levels, and investment appetite, whereas assets of lower quality and inferior location may be compelled to reevaluate their asking terms.
While not with immediate effect, increasing interest rates are likely to push yields higher as well. With global economies still fearing geopolitical and market uncertainties, there is more than one reason to expect a rise in transaction yields. MBL remains cautiously positive regarding the local industrial investment market, as the aforementioned fluctuations might as well attract new, yield-hungry investors filling the void and creating a healthier competitive environment for existing market players. The average yields vary between 8% and 9% depending on location and property characteristics.
Source: MBL
