Serviced Office Tag

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.

Read the full report here.