The total stock of class A and class B office space in Sofia arrived at 2.493 million sq.m at the end of 2022, 70% of which situated in the suburban areas of the city. Currently, the corridor alongside Tzarigradsko shose and Alexander Malinov blvd. hold app. 35% of the total office inventory, followed by the business district in Hladilnika.
Despite the rough market conditions for investors, construction activity is gaining pace in Q4. At the end of 2022, approximately 246,000 sq.m of office space is under construction The largest portion of construction activity is happening in the already popular business districts, i.e. Tzarigradsko shose and Hladilnika, holding half of the under construction projects.
The office market in Sofia registered a positive net absorption of 16,500 sq.m for Q4. The year-end net absorption amounts to 70,000 sq.m which makes 2022 the strongest year for office space since the pandemic. New lease acquisitions amount to 30,000 sq. m for the quarter, and 123,500 sq.m for the year.
Vacant space in office buildings class A and B at the end of Q4 in Sofia stands at 402,000 sq.m which derives to a vacancy rate of 16.1%.
Suburban areas continue to have the highest vacancy rate (19.0%) as they also hold the largest portion of office space. The most significant change in vacancy is observed in the central business district. Asking rents in the center are the highest while most of the buildings in this area cannot offer the same conditions as modern offices in some suburban areas, which makes them uncompetitive and slowly shifts tenants’ interests.
Currently, the available office space that is actively marketed in both existing office buildings and projects under construction stands at approx. 552, 000 sq. m as of Q4 2022, marking a 66,000 sq.m increase compared to the previous quarter.
The asking rental rates for Class A office space, with very few exceptions, are in the range of €12.5 – €15.5 per sq. m, while Class B rents between € 8.0 and € 10.5.
The ECB has increased policy rates by 2.5 percentage points and will raise them further to manage the inflation. This will have a significant impact on the cost of debt, resulting in raised cautiousness of investors and moderate construction activity in the following year.
The 20-year high inflation rate will provide landlords with the opportunity to force indexation clauses on their existing lease contracts and increase rental levels significantly in 2023. This will most probably affect the asking rents as well, especially in modern buildings with good location.
Demand and vacancy rate will most probably experience short-term shifts derived by disruptions of some of the largest IT companies in the world which have been cutting costs at extreme pace in the last months and could cause a domino effect for local companies as well.
As a rule, investment yields are proportionate to interest rates. As interests are increasing, it is expected yields to be on the rise as well in 2023.
The year 2022 has been active in terms of investment deals in the office segment with total transaction volume of over € 65,000,000. Most of the transactions (ca.65%) were occupier driven, where cash rich companies preferred to buy their office space rather than rent it.
Even though in many cases there is no lack of enthusiasm on the investment market, a gap between sellers’ and buyers’ expectations is present, which limits the activity.
Still, MBL is maintaining cautiously positive outlook for the office investment market in 2023. With the cost of debt rising and speculative investors having difficulties securing the necessary financing for their projects, cash rich companies or individuals will have the opportunity to drive the market and acquire an asset for either their own needs or to protect their cash in an income-generating real estate.
Source: MBL
