The Bulgarian commercial property market in 2023 will maintain activity around last year’s levels. Main buyers are again expected to be local investors with sufficient funds or being able to obtain favorable credit terms. This is what the consultancy company Cushman & Wakefield Forton is forecasting for the period.

“The last year was challenging in terms of the investment market. The war in Ukraine, the high dynamics in the prices of building materials and energy resources have created a sense of general uncertainty, which has been accompanied by expectations of rising interest rates. Given the ongoing market trends, we expect domestic investors to remain the main property market driver in 2023. There will be increased interest in distressed assets. Commercial properties in attractive locations with stable yields will continue to be appreciated by investors”, said Yavor Kostov, Managing Partner at Cushman & Wakefield Forton.

C&W Forton estimates the total volume of commercial property transactions in 2022 to be just over EUR 270 million. Transactions with traditional market assets – office and retail space – are predominant, while there is also a stir in the industrial property segment.

Rents in all segments of the commercial real estate market continue to grow smoothly – a trend that has been observed since the end of 2022 and reflects high levels of inflation. Increasing interest in leasing or project development is being seen in flexible office space and retail parks, notes Cushman & Wakefield Forton.

Office Space

In 2022, the office space market in Sofia has undergone a noticeable change related to the imposition of a flexible working model and space optimization by many companies. The connection between business growth and office expansion has been broken. Working remotely allowed many companies, especially in the IT and BPO industry, to grow without renting additional space. This means that despite stable market in 2022, the market still cannot return to its 2018-2019 volumes. Renewals of expiring leases and tenant relocations to new buildings in more attractive locations remain the main drivers, but this is not delivering organic growth. Despite the completion of a relatively high volume of new office buildings during the year, the vacancy rate remained relatively stable at around 16%. At the same time, new projects are hardly being started will lead to the gradual absorption of vacant space and shortage of quality offices in the medium term when demand returns to normal.

“In 2023, we except construction of new office space to remain low, given the uncertain market and difficult-to-predict costs. On the other hand, in the excepted recession, many sectors will slow or stop their growth, which will negatively affect demand. All this suggests that the market will remain active, but at lower volumes compared to peak years. The shift of demand towards newer and higher quality projects will strengthen the market segmentation and lead to vacancies and higher vacancy rates in the class B segment,” said Yordan Krastev, Manager Office Space at Cushman & Wakefield Forton.

Fexible Offices

2022 was a decidedly strong year flexible offices and co-working spaces. This is based on increased demand in terms of volume and new customer types entering this market. As a result of these trends, new space opened during the year and the total supply of co-working space and serviced offices in Sofia is now approaching 60,000 sqm.

“An interesting trend is that almost all of the new space in past year opened in high- end office buildings, for example Myflex in Megapark, Betahaus in Advanced Business Center, etc. This confirms the new trend that we at C&W Forton outlined at the beginning of the year – flexible office solutions are now becoming part of the office building mix,” said Krasimir Petrov, Property and Asset Management Manager at Cushman & Wakefield Forton.

The level and variety of services and products in the segment continues to diversify for the now larger spectrum of customers – from individual consumers and start-ups to mid-sized and large corporate clients who have different requirements for the standard of finish of office space and the range of services included.

Expectations for 2023 are the volume of customer seeking flexible office solutions will continue to grow. Supply will also increase as this type of space has high occupancy and some operators are planning to expand. There is also interest from landlords to integrate flexible office space into their buildings. Between 10 and 20 thousand sqm of new co-working serviced offices are likely to come to the market in Sofia in the next year.

Retail Space

The past year 2022 was marked by extremely rapid development of retail parks. Over 100,000 sqm new space was opened countrywide, mainly in the second half of the year. This is nearly three times more than the space opened a year earlier. Developers’ interest in retail parks is backed by the sustainable performance of this market segment during the COVID-19 pandemic. In addition, retail parks became a platform for retailers’ expansion towards the regional cities.

At present, there are over 300,000 sqm of retail parks operating in the country (only projects with more than 5,000 sqm lettable space included). The supply is expected to increase by over 50% within the next two years.

“The good news is that the negative effect on the retail space market from the COVID-19 closures has almost entirely overcome. In 2022 we saw many store openings and new brands entering the market, as well. We register interest mainly from budget to mid-price clothing and footwear brands”, said Yordanka Velikova, Expert Retail Space at Cushman & Wakefield Forton.

Many brands that already have operations in Bulgaria, such as Pepco and Sinsay, are also actively opening new outlets. FMGG sector, home furnishing stores, drugstores and sport goods are also growing rapidly.

Industrial Properties

The last year was marked by high development activity in the industrial property market. Most new projects are for owner occupation since rising inflation as well as growing construction and operating costs led to significant rent increase. By the end of 2022, rents in Sofia exceeded 5 euro/sqm for prime properties. The gradual absorption of the new supply led to significant reduction in vacant space, which dropped to approximately 1% of the total supply.

“The high volatility of construction costs is expected to have significant impact on the supply of logistics space, in addition to rising cost of financing and capitalization rates on the property market. This will put yields under upward pressure and is expected to lead to further rise in logistics rents”, said Zhoro Angelov, Manager Industrial and Logistics Space at Cushman & Wakefield Forton.