Sofia's office space market registered another quarter of strong performance at the end of 2007, according to the latest MBL consultancy report.
The number of class A and B offices continued to grow, amounting to 784 000 sq m as of the end of fourth quarter of 2007, after a new delivery of 48 350 sq m office areas, all of them in suburban areas, according to research from MBL.
Provided data includes areas in single-tenant owner-occupied and speculative (developed as an investment product – aiming at subsequent sale/rent of the units for reaping profits) buildings, as well as in condominiums.
More than 580 000 sq m of class A and B office space were under construction in Sofia at the end of last year, two thirds of which were in suburban regions. Tsarigradsko Chaussee Blvd emerged as a main office location, with a view to the pipeline, MBL advisory commented.
Considering the total volume of planned projects, MBL analysts expect that Sofia's office stock will surge by more than one million sq m over the next three to five years. About 260 000 sq m of new office developments will be added to the market in 2008 alone. As a result, the total volume of existing offices at the close of the year will surpass one million sq m, according to the survey.
Office vacancy rate continued to shrink in Q4 2007 and, after supply gained six per cent, vacant space registered a slight 1.7 per cent rise, reaching 38 480 sq m.
Existing available space was a little below that level. However, at the end of the year it reached 42 100 sq m, after the rental contracts for about 3620 sq m offices expired and had to be renewed.
Towards the close of 2007, vacant rate of class A and B office space declined from 5.1 per cent, recorded in September, to 4.9 per cent in December.
Several buildings, which were completed at the turn of 2007, accounted for the significant hike in vacant space from 23 350 sq m in December 2006 to 36 090 sq m six months later and agents still experience difficulty in securing their occupancy.
The Central Business District (CBD) continues to be the best-performer – with only 1.9 per cent vacancy, followed by the so-called Broad Centre and the suburbs – with 5.6 per cent vacancy rate each.
Only midtown zones marked a rise in vacant areas, attributed to a single existing class B building delivering an office stock that was originally envisaged as a retail one.
As a result of last year's boosted demand and the successful pre-lease campaigns (securing tenants before construction works have finished), the net absorption of modern office space reached 47 710 sq m. This is quite a good result, particularly when compared to last year's overall performance, which stood at 151 500 sq m of absorbed space. By comparison, the delivery of newly constructed office developments for the same period was 166 500 sq m.
Average rentals of class A offices increased considerably, particularly in the suburbs. After the last batch of class A developments, offered at 12 euro a sq m a month, was exhausted, average rental prices grew by 14.6 per cent in Q4 2007, hitting 16 euro a sq m. All in all, rent prices fluctuated between 14 and 20 euro a sq m at the close of 2007. The last stock of vacant office units, rented at 26 euro in Landmark centre, was occupied shortly before the reviewed period and this transaction affected the statistics – quoted rent levels dropped by 9.9 per cent, due to a lack of expensive office space which could boost the average offer levels, MBL consultants explained.
Asking prices for class B office areas, however, remained stable with the exception of the CBD, where they lost 3.3 per cent. This fall is attributed to the fact that office areas, which were offered at unreasonably high prices of 18 euro a sq m towards the wrap-up of Q3 2007, reduced their asking rents to 15 euro at the end of the year.
Current rentals for class B offices vary between 7.40 and 16 euro a sq m, depending on location. About 57 per cent of vacant space is offered at 10 euro a sq m.
The office market registered serious investment activity in the fourth quarter of 2007, after the conclusion of the largest (so far) portfolio transaction on the Bulgarian market amounting to 210 million euro.
Annual yields in the office segment maintained its high levels. Prices were low compared to other European markets, MBL consultancy reported, and implied that this was unlikely to change in the foreseeable future.
The impact of the US credit crunch on the cost of finance, the rising current account deficit and Fitch’s downgrading of Bulgarian rating rendered investment in business properties in Bulgaria riskier than in other European markets.
