CUSHMAN & WAKEFILED FORTON: COMMERCIAL REAL ESTATE TO TURN THE CORNER IN 2024
RENTS IN LOCKSTEP WITH INFLATION ACROSS ALL MARKET SEGMENTS NEXT YEAR
OFFICES LIKELY TO EXHAUST THE UPWARD POTENTIAL FOR AVAILABLE SPACE WITHIN 12 MONTHS
We expect the start of a turnaround on the commercial real estate market in 2024. At first, this would show up in leasing activity, but latter it would include investment activity as well. The turnaround would materialize should current trends in the local and global economy, and the labor market, remain unchanged. In the office segment, the coming year would be the last shaped by space optimization and rising vacancy. On the investment market, activity is likely to be limited with investors remaining cautious. Interest rates remaining on hold indicate that the end of the downward cycle is behind the corner. This is what the analysis of commercial real estate consulting firm Cushman &Wakefield Forton shows.
“Although it is somewhat early for optimistic forecasts, most key economic indicators have stabilized, and this typically precedes a change in direction. Should inflation continue to decline and interest rates stop climbing in the next few quarters, by the end of 2024 or early 2025 we would see signs of the commercial real estate market returning to growth,” comments Yavor Kostov, Managing Partner at Cushman & Wakefield Forton.
The consulting firm predicts that investors with own capital or access to credit resources would lead the market.
“We expect them to be selective and to focus on projects with solid fundamentals and predictable return. Most likely, they would seek investment opportunities in undervalued and distressed assets that have potential for market repositioning and appreciation within the useful life of the project,” sums up Anastasia Tsolova, Head of Capital Markets at Cushman & Wakefield Forton.
In her opinion, investors applying strategies with moderate and controlled risk would be most active on the market. Purchasing interest is also expected from investors seeking commercial real estate for own use or expansion of existing portfolios.
The outlook is for investment yields across all segments to continue to edge up to offset the rising expenses on credit facilities.
Rising available space on the office leasing market is likely to come to an end before 2024 is over. The reason, 5-year rental contracts signed in the pre-crisis 2019 are due to expire within the next 12 months. Since 2020, the market changed course towards optimization of corporate offices, particularly in the IT and BPO industries, due to the pandemic and hybrid work models.
“The coming year would be transitional. On the one hand, we expect indicators like vacancy to change direction as well as further divergence in demand for Class A certified buildings versus lower-category facilities. On the other hand, rents would continue to rise and so would the interest in flexible office space,” comments Yoanna Dimitrova, deputy manager Office Space at Cushman & Wakefield Forton.
The consulting firm expects that vacant office space would continue to rise and reach a peak in 2024. Some 100,000 square meters of new office space scheduled for completion next year in combination with continued optimization efforts by tenants would push the vacancy rate higher. In the third quarter of 2023, vacancy stood at an average of 16% for Class A and B facilities in Sofia.
After a steep rise in 2023, expectations for the next 12 months are that rents would increase at a slower pace, in lockstep with inflation. Towards the end of this year, Class A office space in the central business district of Sofia was leased for 16 to 17 euro per square meter, while rents in office buildings along the main boulevards ranged between 12 and 15 euro per square meter.
Interest in flexible office space in Sofia remained solid, with some 60,000 square meters in stock and further 10,000 square meters in development. There was a clear trend among growing companies to migrate from co-working to regular office space within the same building or area. As a result, increasing number of office buildings added co-working space to the offered mix.
Retail parks will continue to be the main growth driver for retail space in 2024. The completion of no less than 100,000 square meters of new modern retail space would boost the offer in this segment next year.
“The interest of retailers and consumers in projects of this format remains high, because these are an excellent platform for growth, particularly towards smaller settlements where consumers look for shopping experience with variety and convenience. Demand for new retail space is driven mainly by non-food discount chains and supermarkets. Presently, there are no indications of pending market entry of new large retailers on the Bulgarian market,” notes Georgi Muhovski, deputy manager Retail Space at Cushman & Wakefield Forton.
In his opinion, rents are unlikely to rise significantly next year. Rather, these would edge up organically via contract indexations in-line with inflation. Of course, some projects may register higher growth due to specific circumstances. Such is also the main trend among shopping malls in large cities.
“So far, double-digit rent levels at retail parks have been achieved only in Sofia. We may expect some regional projects to hit double-digits next year too. Yet, the gap between the capital and the rest of the country would likely become more pronounced as new retail parks in Sofia open for business,” notes Georgi Muhovski.
From an investment perspective, consolidation in the retail park segment would continue, albeit at a slow pace. International players following developments in Bulgaria may initiate specific steps for market entry.
LIGHT INDUSTRIAL AND WAREHOUSE SPACE
The available light industrial and warehouse space offered in Sofia was limited in the last quarter of 2023. Yet, construction activity in the segment remained high, exceeding 330,000 square meters for own use and rental in the capital. This should bring available space to healthy levels over the next couple of years. The trend was a response to unsatisfied demand for new and modern rental space, which encouraged investment in the segment.
“The low levels of available logistics space for rent affected leasing activity in 2023. This led to rapid take-up of readily available space as well as such still in construction. Looking ahead, this would create opportunities for new speculative projects as well as for expansions of existing logistic facilities,” summed up Zhoro Angelov, manager Industrial and Logistics Space at Cushman & Wakefield Forton.
In his words, the leading investors were local and established market players.
Following a notable rise in 2023, warehouse and logistics rents are unlikely to change significantly next year. Rents for Class A warehouse facilities, exceeding 10,000 square meters, along Sofia’s Ring Road would stay in the range between 5.40 and 5.90 euro per square meter. For properties beyond this artery, rents would likely stay within the bounds of 4.90 and 5.40 euro per square meter. The practice of higher offer prices at some projects would continue and so will that of discounts for long-term contracts and rental of larger areas.
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