Recovering office market in Sofia

Renewals and relocations dominate the office market in Sofia according to Cushman & Wakefield, Forton report. Companies mainly seek Class A offices and new builds with flexible office spaces. The hybrid working model also gives comfort to many businesses to grow.

 

Modest economic growth expectations

At the start of 2022, Bulgaria’s economy was in a good shape, despite mounting headwinds from the war in Ukraine. First quarter GDP increased 5% y-o-y, driven by strong domestic consumption and unemployment narrowed to 4.9% – the Q2 2022 report writes.

 

The main threats to the economy are rising fuel and energy prices and related inflationary pressures. In line with the overall uncertainty, the latest economic projections show that real GDP growth in 2022 is slowing down to 2.8% and inflation rising to near 13%.

 

The hybrid work model gives comfort to many businesses to grow 

The office market in Sofia is still recovering, although the leasing activity in the first half of 2022 was above the five-year average, reaching 85,444 sqm. The hybrid work model gives comfort to many businesses to grow and hire staff without office expansions.

 

Renewals and relocations to Class A spaces

The latest results in modest net absorption (occupied vs. vacated space) – 13,387 sqm for the half-year. Renewals and relocations continue to dominate the leasing market, with more than 70% of the take-up. The occupiers’ desire for better working conditions remains the main driver, so a larger part of the transactions is in Class A offices and new buildingsIT and BPO companies keep the largest market share, with more than half of the total transaction volume in the first half of 2022.

 

Flexible office spaces are popular due to solutions for expansion

An increasing number of companies are looking for flexible office space, thus providing their business with rapid expansion solutions.

 

As of mid-year the overall supply in this segment in Sofia is approximately 50,000 sqm. On the supply side, the slow pace of office development limits the availability and keeps the vacancy rate stable. The completion of a mid-size office project in the second quarter of 2022 slightly raised this indicator to 16.7%. However, with the decreasing pipeline and the lack of starting office developments significant change in the vacancy rate seems unlikely.

 

Stable rents, Landlords under pressure

Prime asking rents in Sofia remain resilient for a consecutive quarter at 15 euro/sqm in CBD and 12-14 euro/sqm alongside main roads. Increasing operating costs put landlords under pressure to increase service charges, with prime rates in Sofia in the range of 2.75 – 4 euro/sqm. Prime yields also remain stable at 7.5% for Sofia.

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