CUSHMAN & WAKEFILED FORTON: EUR 190 MILLION OF COMMERCIAL REAL ESTATE INVESTMENTS IN 2023
Commercial real estate investment deals worth EUR 190 million were concluded in Bulgaria in 2023. Office properties accounted for just over 50% of this volume, followed by hotel and retail facilities, according to data from commercial real estate consulting firm Cushman&Wakefield Forton.
The consultants’ data shows that the second and third most active segments – hotels and retail facilities – accounted for 18% and 17% of the total volume, respectively. Following CTP’s large portfolio deal the year before, light industrial and warehouse facilities achieved relatively modest results. A key characteristic of this segment is that buyers typically acquire modern, well operating facilities, rather than properties with good location, but in need of serious upgrade. In 2023, this segment accounted to just 6% of total investment volume.
“The investment market is perfectly in-line with trends from previous years, both in terms of volume and deal types. We observe predominantly domestic buyers focused on transactions with undervalued assets, or such with potential for added value,” sums up Yavor Kostov, managing partner at Cushman & Wakefield Forton.
MODERN OFFICE SPACE
THE HYBRID WORK MODELS CONTINUE TO PRESSURE TRADITIONAL OFFICE SPACE
The volume of leased office space in Sofia reached 181.7 thousand sqm, at par with levels from the pre-crisis 2018 and 2019. The key difference is that back then a large portion of the deals were extensions, pre-leases, and new leases, whereas over the past two years renewals make up the bulk of contracts.
Considering that newly completed office space in the capital did not exceed 15,000 sqm in 2023, the past year was among the worst in terms of new projects in the entire history of the office market. On the one hand, this led to negligible share of pre-lease contracts. On the other hand, though, it kept the level of vacant space relatively high at 15.5-16.5%, but stable, given the ongoing space optimization drive among IT and BPO clients. The data of Cushman&Wakefield Forton for the last quarter of 2023 shows that 15.6% of the Class A and B space in Sofia was vacant.
“Over the past year we observed a clear split in demand for office space. Clients increasingly focus on high-quality, modern, and technological buildings despite the higher price. This affects vacancy levels and rents both at specific projects and various office zones. A two-speed market has clearly taken shape,” comments Yoanna Dimitrova, deputy manager Office Space at Cushman & Wakefield Forton.
According to Dimitrova, the troubles in the global IT and BPO industries will pose a challenge to the office market. Be that as it may, there are positive developments. Flexible offices continue to expand and to ultimately deliver traditional offices with clients who at an earlier stage were customers of co-working facilities.
In field of flexible office space, the rapid development of the market continues, mainly in the office building segment. The leading operators on the market are already well established and the bulk of lease agreements concern entry into office buildings along the main boulevards in Sofia’ suburbs. Towards the end of 2023, there were some 64,000 sqm of flexible office space in operation with additional 13,000 sqm in the pipeline for 2024.
Rent levels visibly increased in 2023, mainly due to inflation and the formation of attractive office zones with virtually no vacant space in Sofia. Rents in Sofia’s CBD for Class A office space reached EUR 17 in the fourth quarter. Given the very limited available space in this part of town, rents are expected to continue to creep up. In the popular office zones along the main boulevards, Class A office space is offered for EUR 13-16 per sqm, while lower categorized office space is offered for EUR 9-11 per sqm.
MODERN RETAIL SPACE
80% OF NEWLY OPENED RETAIL OUTLETS IN 2023 WERE LOCATED IN RETAIL PARKS
Retail parks were a key driver of the market for retail space in 2023, registering exceptional level of activity. As much as 18 facilities with a total of 174,000 sqm of GLA were opened for business in the period. This constituted a growth rate of 130% compared to 2022, according to Cushman&Wakefield Forton data.
“The performance of retail parks in 2023 was very robust and is expected to continue into 2024. Facilities with some 100,000 sqm of GLA are currently in construction. On this background, shopping centers are at a high plateau in their life cycle and significant activity in the segment is unlikely in the coming months,” comments Georgi Muhovski, deputy manager Retail Space at Cushman & Wakefield Forton.
In 2023, new outlets with 220,000 sqm of GLA were opened in shopping centers and retail parks. Nearly 80% of these were located at retail parks. At the outset of 2024, five more retail parks with 77,000 sqm of GLA were in construction and an additional 20,000 sqm in partially opened facilities was being completed. Finally, further seven retail parks with total GLA of 95,000 sqm were in planning phase.
According to the consultant’s observations, the leading participants on the market for retail space in 2023 were discount chains and supermarkets.
Following a slight uptick in the second quarter, rent levels along high-streets in the larger towns stabilized for the rest of the year. Vitosha boulevard in Sofia ended 2023 with rent levels about EUR 54 per sqm, compared to EUR 53 a year ago. In the shopping center segment, rents edged up slightly both at the outset and the close of the year. In the main shopping centers in Sofia, rents reached EUR 37 per sqm, compared to EUR 35 a year ago. In the retail park segment, a slight increase at the start of the year was followed by a freeze for the rest of the period. Stable rent levels reflect increased supply of new retail space. At the close of 2023, rents in retail parks hovered about EUR 11 per sqm, compared to EUR 10.50 a year earlier. Significant price hikes in 2024 appear unlikely.
LIGHT INDUSTRIAL AND WAREHOUSE SPACE
SLIGHT RENT INCREASE AND LOW VACANCY LEVEL OF LIGHT INDUSTRIAL AND WAREHOUSE SPACES
Sofia ended 2023 with a total stock amounting to 2 million sqm of modern warehouse and logistic space. The year was marked by a relative uptick in activity. Some 268,000 sqm of new space was completed over the past twelve months, compared to just 122,000 sqm in 2022.
According to Cushman&Wakefield Forton, the main concentration of new facilities was in the Bozhurishte zone to the west and Elin Pelin to the east.
“The Ring Road also registered greater project activity in 2023. For the first time in a while, new speculative facilities were completed there,” commented Zhoro Angelov, manager Industrial and Logistics Space at Cushman & Wakefield Forton.
Currently, projects for 293,000 sqm of GLA are under construction in and around Sofia, about 16% of which are speculative, according to preliminary data from Cushman&Wakefield Forton. The consulting firm expects that the volume of space under construction and in planning will continue to rise.
CTP Sofia West 1 and 2, CTP Sofia East 1, the expansion of the logistics center of Lidl in Ravno Pole, and the expansion of the logistics center of Jysk in Bozhurishte were among the key projects completed in 2023. FMCG distributors and retail chains were leading actors on the market as tenants and investors. Other active players came from the logistics, courier, and e-commerce industries.
Due to limited supply, available space will continue to decline. Over the past five years, vacancy rates fluctuated between 2% and 4% of the total stock. In 2024, the available space will come down within 1-2% of the stock. The consultants note that demand is rising and would absorb the available space in the recently completed speculative facilities.
Indexation and lack of available space led to an increase in rent levels in 2023. Looking forward, the price of newly constructed Class A warehouse space within the Ring Road of Sofia is expected to stay in the range of EUR 5.4-5.9 per sqm, whereas rents at facilities beyond this landmark would be in the range of EUR-4.9-5.4 per sqm.
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