A steady recovery across the commercial real estate markets in Bulgaria helped shift the investor interest towards unfinished and unoccupied projects, distressed real estate and development land for sale in 2014. Assets worth €239 million changed hands with the majority of transactions related to debt and equity restructuring on the part of banks or property owners, said Forton, independently owned and operated member of the Cushman & Wakefield Alliance, the world’s largest privately-held commercial real estate firm.
“At first sight the numbers impress but we should keep in mind that just € 84 million of this volume can be attributed to the typical investment market – operational buildings capable of generating relatively steady income”, said Michaela Lashova CEO of Forton. “Nevertheless, this still does not change the fact that demand for investment property is growing. Buyers are motivated by a strong recovery of occupier demand for office space coupled with an opportunity to acquire high-quality projects in other sectors at historically low values.”

Office Space

The recovery of the office market continued unabated in 2014 with the fourth quarter the strongest confirmation of this trend. Full-year take-up amounted to more than 154,000 sqm, up 42 per cent on previous year’s 108,000 sqm.
The office vacancy rate in the capital city was down from close to 30% in the last quarter of 2013 to just over 26% for the same period of 2014. The decline is mostly driven by the class A office requirements of expanding multinational companies, predominately in the in the business process outsourcing and information technology sectors. Moreover, according to Forton another 7,000 sqm were taken up by BPO companies outside the capital city. “This is just the beginning. The BPO sector is only starting to move outside Sofia”, commented Stanimira Pashova, Head of Office Space at Forton.
The total modern office stock in Sofia at present amounts to 1.69 million sqm, with additional 124,000 sqm in the active pipeline. Rents were stable between €10.5 and €12.5 per square meter per month as a result of strong demand and diminishing grade A availability.
Office real estate investment totaled €66 million in 2014. Expectations remain high underpinned by the positive developments in the segment. On the other hand, the restart of suspended projects is another sign of the recovery in the office market.

Retail Space

The first successfully restarted retail project became reality in 2014 with the opening of Panorama Mall in Pleven. According to Forton, the restructuring of poor performing projects is beginning to stand out as a major transaction and supply source in the near term. At the same time, the leading shopping centers in the country reasserted their positions. Sofia saw 31% year-on-year growth in the total shopping center stock. Retail space per 1,000 residents has reached 105 sqm for the country. Among the cities Sofia ranks forth with nearly 280 sqm, behind Stara Zagora, Burgas and Gabrovo.
Occupier demand was stable and Sofia and Varna attracted new brands. The new entrants are focusing on established locations and projects with already present brands moving one step further with new developments and smaller markets.
The occupier interest in Vitosha Boulevard, Sofia’s flagship high-street store location, has recovered and the single 1,000+ sqm opportunity was taken up by C House Italia lounge café. Rents remained stable at €44 sqm/month for single-story ground-floor space.
Headline rents in shopping centers were seen down to €20 per sqm.

Industrial and logistics space

Again in 2014, the industrial and logistics market failed to emerge from the constraints of insufficient supply. Construction starts are low and so are construction volumes leaving occupiers trapped in their current locations. As a result, companies are forced to look for alternative ways to the market for instance in vacated big-box stores at inner city locations.
The end of the year brought the first speculative delivery since 2012. Phase II of East Ring Logistics Park added 6,000 square meters of prime warehouse space, lifting the total stock to 826,000 sqm. The vacancy rate moved up but is still low at 3.1%, and occupiers are still faced with a narrows range of options.
Limited supply was a main reason for prime rental growth year-on-year to €3.75 sqm/month in the end of 2014. Combined with the strong recovery in the office sector, logistics projects with strong office component could thus be potential target for investors.
Meanwhile, Bulgaria remains a focus for international industrial companies; therefore transactions related to build-to-suit projects as well as land sales are likely to continue to generate the bulk of investment in the segment.