Research

ECONOMY: On positive trajectory

All things considered, halfway through 2023, Bulgaria’s economy is doing quite well. Inflation, a huge problem for most CEE countries, has receded back to single digits (7.5% in June) and was just above the average for the Eurozone (5.5% in June). The main economic indicators for the first quarter were all positive. The number of unemployed dropped 6% y/y and the employed edged up slightly both nationally and in the capital Sofia. GDP grew by 2.3% y/y, or more than twice as fast as the EU average.

SUPPLY AND DEMAND: Increasing vacancy rate

The office market in Sofia posted visible slowdown in the first half of 2023, with leasing volume decreasing by 11.5% y/y. Transactions for the period amounted at 75,598 sqm. Lease renewals retained the lion’s share of the total volume, followed by relocations. Since hybrid work remains a strong trend, many occupiers continue to optimize their office spaces when renewing their contracts. These trends resulted in extremely weak organic growth, with net absorption dropping down to 457 sqm in the second quarter of 2023.

The slowdown of leasing activity resulted in sluggish office construction over the last year and low volume of new completions. In the second quarter of 2023, the pipeline in Sofia remained below 200,000 sqm, with the delivery of a small office building in CBD and an office part of a mixed-use project. The increasing supply, together with the tight occupier market resulted in increase in the vacancy rate to 16.58% as at mid-2023.

A positive trend is the evolution of the shared offices segment. An increasing number of office projects incorporate coworking spaces in their mix, in order to attract growing businesses and to offer more flexible solutions to the existing occupiers. By mid-year, the supply of coworking space and serviced offices in Sofia reached approximately 63,000 sqm, with another 10,000 sqm in the pipeline.

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ECONOMY: GDP growth is slowing down

Softening domestic demand will undermine GDP growth in 2023 as inflation continues to erode purchasing power. Nonetheless analysts forecast a higher economic increase than the EU average after keeping pace with it at 3.4% in the previous year. The strength of the labor market will underpin consumption as employment and the unemployment rate posted their second-best year on record, in 2022. Meantime, inflation at the end of 2022 was among the lowest in the CEE region and is likely to come down at a slightly faster rate than in other peers.

SUPPLY AND DEMAND: Low pipeline and stable vacancy rate

The Sofia office market is moving at two speeds, with projects in prime segment performing distinctly better than the rest of the market. Leasing activity reached almost 42,000 sqm in the first quarter of 2023, surpassing the 5-year average for this period of the year. Even with the hybrid work model, some companies are increasing their spaces and this is driving up the share of expansions and preleases in overall demand. Despite this positive trend, renewals and relocations still form the prevailing part of leasing activity, which results in moderate net absorption – 10,848 sqm in the first quarter.

Growing demand for coworking space is another noteworthy market trend. In order to respond to occupier preferences, increasing number of office buildings are incorporating flex office solutions. At the beginning of 2023, the supply of coworking and serviced office space in Sofia surpassed 61,000 sqm, with another 11,500 sqm under development. Unlike the coworking segment, the office pipeline is tightening, due to the anemic start of new projects. The vacancy rate for class A and B office buildings in Sofia is hovering around 16% and is expected to remain stable for the foreseeable future.

Read the full report here.

ECONOMY: GDP growth is slowing down

The Bulgarian economy is forecasted to lose speed in 2023, reflecting the lower domestic demand and worsening external environment. According to the World Bank, Bulgaria’s GDP is expected to increase by only 1.7% in 2023 in the light of the looming global recession. One of the main growth factors – private consumption, is negatively affected by the price increases, tightening labor market and higher borrowing costs. The latest projections of the Bulgarian Central Bank are for 14.9% annual inflation at the end of 2022 and gradually slow down to 4.1% at the end of 2023. Although remaining volatile, food and energy prices are expected to decelerate gradually, especially in the second half of the year.

SUPPLY AND DEMAND: Low pipeline and stable vacancy rate

With 76,009 sqm leased space in the last quarter of 2022, the office market in Sofia registered activity comparable to the prepandemic time. The total take-up for the year reached 186,655 sqm. Although looking optimistic, this volume is formed mostly by renewals and relocations, with minimal net effect for the market. Space optimization remained the leading trend over the last year, since many companies continued to use their offices at partial capacity, due to the hybrid work model. Overall, the market was driven primarily by tenants with expiring contracts, looking to renew their leases or move to another location. Net absorption remained moderate, with 48,683 sqm annual volume.

Development activity posted visible decrease in 2022. The office completions were reduced to 55,514 sqm over the year, since a lot of projects were withdrawn in time. However, this will give more time for the available office space to be absorbed and keep the vacancy rate stable in the coming quarters. As at the end of 2022, the share of vacant offices in Sofia remained around 16%. The space under construction is still under 200,000 sqm, although the start of a new part of large office project at the fall of the year.

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ECONOMY: GDP growth is slowing down

The Bulgarian economy is facing a challenging time, as a result of the deteriorating external environment. The real GDP growth is expected to slow down to 2.8% in 2022, followed by anemic increase of 0.1% in 2023 in the light of the forecasted global recession. The economy is affected mostly by the deceleration of the private consumption, reflecting the negative effect of the growing inflation on the disposable household income. The latest projections of the Bulgarian Central Bank are for 14.9% annual inflation at the end of 2022 and slowdown to 4.1% at the end of 2023. A bright spot are public investments, which are expected to increase, primarily due to European funds.

SUPPLY AND DEMAND: Leasing activity around the five-year average

The leasing activity on the Sofia office market for the nine months remained around the five-year average, reaching 110,646 sqm. Lease renewals and relocations remained the main driver, since most tenants tend to change their office mostly when their contracts expire. During the period, expansions retained a small share of the market, accounting for 11% of the total take-up. Net absorption remained moderate, although on a positive territory – 20,537 sqm for the nine months. The figures reflect the wide spread of the hybrid work model and the attitude of many businesses to optimise their office space. However, the opposite trend is gaining strength, with an increasing number of companies that want their employees back in the office. The demand for serviced offices and coworking space is at its peak. Because of the inconsistent utilization of the workstations, increasing number of occupiers are looking for more flexibility related to lease term and occupied areas. As of the nine months, the overall supply in this segment in Sofia is exceeding 50,000 sqm and will grow further. During the third quarter, the vacancy rate remained stable at 16.6% for Class A and B offices, since the slow pace of office development limits the availability. The completion of two small office buildings added about 7,000 sqm to the market stock. Space under construction dropped to 167,300 sqm, the lowest level in five years.

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ECONOMY: Modest 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%. 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 for Bulgaria are worsening. Real GDP growth in 2022 is seen slowing down to 2.8% and inflation rising to near 13%.

SUPPLY AND DEMAND: Hybrid work reshapes the market

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. 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 larger part of the transactions is in Class A offices and new buildings. IT and BPO companies keep the largest market share, with more than half of the total transaction volume in the first half of 2022.

Increasing number of companies are looking for flexible office space, thus providing their business with rapid expansion solution. As of the 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 of the vacancy rate seems unlikely.

Read the full report here.