ECONOMY: Above and beyond

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. Partially this is thanks to the industrial sector where the assessment of export orders in February improved to its highest in 16 months and expectations for the near-term notably bettered.

SUPPLY AND DEMAND: Calm and confident start

Sofia’s market for light industrial and warehouse space slowed down the tempo in the first three months of 2024. Take-up narrowed to mere 11,760 sqm from over 80,000 sqm in the previous quarter. This reflected weakened demand due to narrowing volume of imports, an industrial sector approaching stabilization (after a lengthy slowdown), and generally soft wholesale. The volume of completed projects stood at 5,100 sqm, the lowest in over two years.

In contrast, development activity remained solid. Construction started on projects with combined GLA of 73,934 sqm, up from 41,000 sqm in the prior quarter. Notably, almost the entire volume was comprised of speculative projects. As a result, the total volume of projects under construction jumped to just over 350,000 sqm, the highest in the past 12 months. Some 144,000 sqm or 41% of the total were speculative, indicating a reasonable confidence among developers about the perspectives of the Sofia market.

The total stock in Sofia stood at 2.04 million sqm of GLA at the end of the quarter. Of these, just over one million were in 10,000+ sqm facilities. Meanwhile, the available space on the market amounted to about 60,000 sqm for a vacancy rate of 2.8% (up slightly from 2.3% in Q4 2023). The bulk of this space was in facilities of 10,000+ sqm, as the market takes its time absorbing the new large projects in Sofia.

PRICING: Rents & Yields at cruising altitude

During the quarter, prime yields increased by 50 basis points to 8% and were just another 50-bps shy of where they were 5 years ago. In the short-term, the current level is seen as the most likely cruising level of prime yields, barring unforeseen market developments. Meanwhile, for the first time since Q4 2021, rent levels stabilized with the price of newly constructed Class A warehouse space at prime locations remaining unchanged at EUR 5.4 per sqm. Looking forward, the rent trajectory is expected to flatten.