ECONOMY: Decent tempo and outlook

Bulgaria’s economy remained solid in the first quarter of 2024, producing the 8th highest growth rate in the EU. The respectable result reflects strong domestic demand, driven by private household consumption, compensating for soft external demand and weak investment activity. The most recent leading indicators suggest that, all things being equal, in the next couple of quarters the economy would likely maintain or slightly improve its pace. Consumer confidence is at its best since 2001, which all but guarantees that domestic demand would remain a key pillar of strength. Meanwhile, the overall economic sentiment is firmly in positive territory with above average confidence in services.

SUPPLY AND DEMAND: Vacancy slightly decreasing

Sofia’s office market registered a small decrease in vacancy rate in the second quarter of 2024, down to 15.3% (50 basis points). It is mainly due to a slight increase in expansions and new leases at the expense of the declining share of contract renewals in the take-up over the period. The leasing volume reached 37,088 sqm which is in line with the 5-year average for the second quarter. In general, the first half of the year did not produce large volumes of transactions or a dramatic shift in the market trend. The IT and BPO industry still leads the market despite slowdown in business and hybrid work. Another notable trend is tenants with growing business moving from coworking space and non-competitive buildings to Class A projects. The office supply posted marginal increase with the completion of two small buildings with combined gross leasable area of 8,200 sqm. By mid-year, the stock for class A and B offices reached 2.259 million sqm. Projects in development phase kept volume below 200,000 sqm due to a lack of new construction starts.

Interest in coworking space continues to grow, mainly as part of the mix in existing office buildings. As at June, the total volume of coworking space in Sofia reached 68 900 sqm with an additional 8 000 sqm in various development phases.

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ECONOMY: Punching above its weight

Bulgaria’s economy delivered another above average quarterly performance at the end of 2023 with the 9th highest growth rate in the EU. Solid domestic demand, driven by private households, handily offset weakness in external demand. Key leading indicators during the first three months of 2024 suggest that economic performance at the start of the year would likely be in-line with recent form. Consumer Confidence is at a 24-year high, boding well for the strength of overall domestic demand. Importantly, the Business Climate indicator is also edging higher, partly due to strong optimism about the near future in the services sector.

SUPPLY AND DEMAND: Moderate Leasing Activity

The office market in Sofia registered moderate leasing activity during the first quarter of 2024. Compared to the same periods in the last two years, the number of closed transactions reduced 10-15% to just over 37,200 sqm. Most of this volume was formed by large renewals and some relocations from noncompetitive or class B buildings. Since IT and BPO companies are slowing down their growth and strongly relying on hybrid work, space optimizations remain a trend. IT industry remains the major office space occupant in the first quarter of 2024, accounting for almost half of the leasing volume. Another notable trend is for tenants with growing businesses to move from coworking spaces to regular offices. Vacancy rate continues to hover around 15-16%, with prime projects almost fully occupied.

Stocks for class A and B offices remained stable at 2.245 million sqm in the first quarter of 2024. Projects in development phase kept volume below 200,000 sqm due to a lack of new construction starts. Recent trends are the result of slow absorption of vacant office space, as well as an unsecure business environment.

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ECONOMY: Healthy Growth

Bulgaria is on course to complete 2023 with healthy growth. The most recent key indicators are positive. GDP growth in the third quarter was 1.8% y/y, the seventh highest in the EU. The unemployment rate for the same period slipped to 4.0% (4.6% in Q2) and inflation in December decelerated to 5% y/y. Yet, there are some mixed feelings. Consumers assessed their own budget and the state of the economy as the best in two and a half years. Meanwhile, business leaders appear concerned. The confidence and business climate indices in services have softened, mainly due to softening demand and worries about the uncertain economic environment.

SUPPLY AND DEMAND: Completions at their lowest point

The office market in Sofia recorded a positive year in terms of leasing volume in 2023. Signed and renewed contracts totaled 181,513 sqm, exceeding the pre-pandemic 2019. Take-up amounted to 67,225 square meters in the last quarter of 2023, in line with the last five years average. Despite the similar volume, the office market in 2019 was driven mostly by preleases and expansions, about 40% of the total volume, while in 2023 renewals had the dominant share. Net absorption remained relatively low over the year at 52,730 sqm. The low number was offset by the extremely low completions – less than 15,000 sqm new office space through the period. As a result, the vacancy rate hovered around 15.5-16.5% over the year, dropping below 16% at the end of 2023. Since larger tenants prefer modern and environmentally friendly offices, even at higher cost, older and technically outdated office buildings saw higher vacancies. In terms of supply, the present year promises to be more balanced with about 104,000 sqm planned for completion, including postponed projects from 2023. The total volume of projects under construction remains low at around 185,000 sqm, due to the lack of new starts.

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ECONOMY: In Good Shape

Nine months into the year, Bulgaria’ economy was in good shape. After a hiccup in July, inflation returned to its downward trajectory, decelerating to 6.4% y/y by the end of September, one of the lowest in the CEE region. Consumer confidence continued to improve, reaching its highest in two years and the business climate index was near a 3-year peak. The latest GDP data showed slight deceleration of growth from 2.2% in Q1 to 1.9% in Q2, which was still the 8th highest in the EU. The situation on the labor market remained essentially unchanged.

SUPPLY AND DEMAND: Anemic Supply

Sofia office market showed moderate activity during the third quarter, with a total of 38,690 sqm leased. This is slightly above the average rates for this period over the past 5 years and 54% higher than the third quarter of 2022. Despite the improved results, landlords continue to report that leases are closing relatively slowly and with a high number of property viewings from potential tenants. The office market remains driven by relocations and renewals, while the share of expansions is relatively small – below 20% of the total leasing volume. This reflects the ongoing trend of hybrid work, especially in the IT and BPO industries, which has a direct impact on the occupiers’ needs of office space.

On the supply side, there was no significant movement on the office market in Q3, with only one small project being completed. The lack of new significant projects and the positive net absorption of office space (15,576 sqm for Q3), led to a minor decrease in vacancy rate in Sofia. However, the levels remain above 16%, which is a relatively high value for CEE. If demand remains muted, the upward pressure on vacancy will persist due to the planned office deliveries in the next couple of years.

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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.

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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.

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