OFFICE MARKET INSIGHT Q3 2020 SoямБa
Occupier Advisory: Find a New OďŹƒce
Project Management
Renegotiate Existing Lease
Interior Design
Compare Current Terms to Market Achievable Levels
Technical Due Diligence
Stay Vs Go Consultancy
Service Charge Review
Corporate Real Estate Strategies
Property Management Due Diligence
Sublease, Assignment and Lease Surrender
Build-to-suit
Landlord Advisory: Lead Agency
Commercial Negotiations
Interior Design
Leasing Strategy
Lease Renewals
Project Management
Oering Strategy
Lease Documentation
Build-to-suit
Competition Analysis
Property Management Set-up
Q3 2020
OFFICE MARKET INSIGHT
Dear Partners, We are excited to share our first Office Market Insight, focusing on the latest trends of the office space market in Sofia as of Q3 2020. Our dedication to increase the added value for our clients inspired us to evolve and raise the bar for the corporate real estate service in Bulgaria. A decade of providing the highest level of corporate real estate services in the region has served as the founding stone of our newly established advisory company – Avalant. Avalant's main goal is to provide exceptional quality of services with unmatched depth and added value without compromising the consultant's integrity. Our regular market research aims to be a testimony for this. Each quarter you will receive an unbiased review of the latest market trends with a broader scope of information, delivered in a more accessible manner.
NEW METRICS and METHODOLOGY In our research we are introducing new key metrics for а more in-depth analysis of our market, including:
We strongly believe that the introduction of these key metrics will benefit all market participants in granting access to a more structured and analytical overview of the office space market.
WE ACCOUNT FOR AVAILABLE SPACE
COVID-19 IMPACT SURVEY:
as an additional indicator of current supply and demand balance. Vacant space represents only physically vacant properties with permit for use, but there are many properties that although currently occupied or still under construction are competing actively for tenants and thus affect market equilibrium.
2020 has been quite challenging for businesses worldwide thus far. The office space market globally and locally has been no exception. We conducted a survey with over 120 major office occupiers in Sofia with regards to the effects that Covid-19 had on their operations and the relationship dynamics with their landlords respectively. You will find a summary of the results of our survey in the last page of this document.
SEGMENTED SUPPLY AND AVAILABILITY we monitor the supply side not only as a cumulative function, but focus our attention on its fragmented components, in terms of location (submarkets) and its specifics (conventional, sublease and flexible workspace).
We remain close to you and the needs of your business and will be available for any questions or need of additional information. Respectfully,
FLEXIBLE WORKSPACE you can rely periodically on a more detailed overview of the rapidly developing flexible workspace market.
Hristo Andonov Director
Q3 2020
OFFICE MARKET INSIGHT
KEY MARKET TRENDS SUBLEASE MARKET IS ON THE RISE
STRONG CONSTRUCTION ACTIVITY
Increasing the competition by offering more favorable terms than conventional supply.
Only a small percentage of construction activity was frozen since March 2020.
DECREASE AND STALL IN DEMAND
INCREASED GAP BETWEEN ASKING AND ACHIEVED RENTS
Most relocation/expansion projects are still on hold. This trend is reinforced by the increased significance of the work-from-home policy.
Most landlords have not changed asking rents since Q1 but are relatively more flexible once entering in negotiations.
1,81
mln. m2
Total Speculative Stock
Sofia at a glance
7,700 m2 in Q3
397 ,000 m
2
8,000 m2 in Q3 Construction Activity
Pre-lease: 0,79 mln m2
Vacancy
10,56%
14,70% 2
m
2
Availability
324,000 m
143,000 m
Asking Rents
€ 11 - 14
€ 6 - 11 23%
78,840
2
2
1,02 mln m2
m
Speculative Stock
151,200
Class B
173,900 m2
Class A
Expected deliveries. Preleases in %
12% 0%
SOFIA OFFICE SPACE Supply Q3 added 7,740 sq. m of new deliveries to the modern office space stock in Sofia increasing actively leased office space to 1,812 mln sq. m (speculative stock). A notable delivery this quarter is MM Building, located in BPS submarket with GLA of ca. 5,200 sq. m.
Speculative stock fragmentation Class A
56%
Class B
44%
Class B
44 %
Class A properties amount to about 56% of thе speculative stock, a share which is steadily increasing with each year. Only about 9% of the speculative stock is situated in the CBD (Central Business District). Another 20% is situated in a radius of about 1 km around CBD, referred to as Broad Center and the remaining majority of more than 70% of the speculative stock is situated in the Suburban areas (mainly along major boulevards, and in the Business Park area).
Class A
56%
Construction activity Construction activity in Sofia remains strong, currently standing at about 394,000 sq. m with the addition of three smaller office projects for ca. 8,000 sq. m breaking ground in Q3. Four new office projects have received construction permits in the last quarter for a total GLA of 18,000 sq. m. Optimism among developers for rapid demand recovery resulted in only a couple of office projects halting construction (28,000 sq. m), increasing the volume of the frozen projects to 96,000 sq. m. Approx. 79,000 sq. m of modern office space are expected to be delivered by the end of 2020, 23% of which are already pre-leased. Further 174,000 sq. m are scheduled for 2021, with pre-lease share of 12%. Delays can be expected especially from projects with no pre-leases agreed yet.
Speculative vs. Owner Occupied Stock Speculative
81%
Owner occupied
19%
Demand Given the strong leasing activity in the period 2017-2019, a similarly solid demand in 2020 was anticipated from investors. However, the unexpected influence of Covid-19 resulted in a significantly decreased demand and halt of many relocation and expansion projects. As a consequence, occupiers are currently evaluating their real estate needs from health and safety, organizational and cost perspectives. Many companies are trying to assess the sustainability of both working from home and longer term measures for social distancing in the office.
Owner
19%
Speculative
81%
Take-up in Q3 2020 stands at 17,350 sq. m, 76% of which has been leased in existing office buildings and the remaining 34% in buildings that are about to receive permit for use in 2021.
Sublease and Flexible workspace The number of office occupiers willing to reduce their office areas led to an increase of the sublease market as a share of the available office space. Est. 15,000 sq. m of plug and play space is currently available with the expectancy of further increase within the next 6-12 months. The flexible workspace market (total footprint of ca. 45,000 sq. m) faced a challenging first half of the year due to Covid-19 restrictions and increased level of uncertainty among occupiers. Similar to the negotiation position of many conventional landlords, a notable increase in the gap between asking terms and the final achievable terms was observed. Furthermore, some of the operators introduced COVID-19 related concessions.
Flexible workspace supply € 250-350
serviced offices (high range)
Serviced offices (mid range)
Coworking
€ 180-230
€ 150-180 *per workstation/month
TOTAL STOCK
45,151
2
m
CONSTRUCTION ACTIVITY HEATMAP Construction Activity 1 2 3
2
CBD
7,685 m
27,791 m 2
BROAD CENTER
156,687 m
2
2
4
HLADILNIKA
102,114 m
5
BUSINESS PARK DISTRICT
48,289 m
2
49,787 m
21,800 m
TSARIGRADSKO SHOSSE
*Available space
2
2
166,515 m 56,120 m
2
2
50,522 m
2
Average Asking Rents Class A
Average Asking Rents Class B
€ 12.00 – 14.00
€ 9.50 – 12.50
€ 12.00 – 14.00
€ 7.00 – 12.00
€ 11.00 – 13.50
€ 6.00 – 10.00
€ 12.00 – 14.00
€ 6.00 – 9.50
€ 10.00 – 14.00
€ 7.00 – 11.00
*Includes available space under construction that will be delivered until Q4 2021.
OCCUPIER COMPETITION 1
CBD
2
Broad Center
A2
A3
2
Sofia International Airport
LANDLORD COMPETITION
1
3
3
Tsarigradsko Shosse
4
Hladilnika
5
Business Park
4
5
Vacancy and available areas The overall vacancy levels in Sofia as a share of the speculative total stock stands currently at 12.37% (or approx. 224,120 sq. m) Class A vacancy is 10.56%, considerably less than class B which stands at 14.70%. Further 30,000 sq. m of existing office space are available for rent although not yet physically vacant and another 60,500 sq. m of available space will be delivered by the end of 2020. 153,000 sq. m of the office space that will be delivered in 2021 is still available for rent. We are expecting vacancy levels to surge along Tsarigradsko Shosse Blvd. and rise moderately in Hladilnika district and Business Park Area due to the high construction activity in these submarkets.
A1
Rental levels Asking Class A rental levels remain mostly unchanged, but we are observing a widening gap between asking and achievable rents. Class A rents range from EUR 12.00 - 14.00 in the CBD and Broad Center and from EUR 11.00 - 14.00 in the Suburban submarkets. Class B rents range from EUR 9.00 - 12.50 in the CBD and gradually decrease when moving away from the city center. Broad Center Class B rents range from EUR 7.00 - 12.00 while in the Suburban submarkets the range is EUR 6.00 - 11.00.
Q3 2020
OFFICE MARKET INSIGHT
АVALANT'S COVID-19 SURVEY In Q2 2020, Avalant interviewed 120 companies leasing 215,000 sq. m of office space and employing 19,000 people in Bulgaria to analyze how COVID-19 affected their short-term real estate strategies in line with the relationships with their current landlords.
AVALANT’S COV I D -1 9 OCCUPIER SURVEY
215,000 m2
120
WE INTERVIEWED
19,000
EMPLOYING
LEASING COMPANIES
OF OFFICES
59%
5%
34%
Of occupiers Approached Their landlords For incentives
Only 5% Landlords Proactively Offered Incetives
Of occupiers Received Temporary Incentives after Negotiations
PEOPLE
The most frequently Seen incentives Included a Temporary rent Decrease *between 20-50% for a period of 2-3 months
Macroeconomic snapshot -8.50%
0.64%
7.50%
€ 683.60
GDP growth Compared to Q2 2019
y-o-y Inflation Q2 2020
National unemployment rate August
Gross Average Salary
Market impact Faced with an unexpected challenge, landlords are starting to modify their leasing strategies in an attempt to adapt to an environment of short-term uncertainty. As a result, we monitor a slight decrease of Class A asking rents and an increased number of landlords, offering more flexibility when it comes to tenant concessions and rent discounts. The uncertainty from demand side in 2020 may shift the market dynamics from a period of landlord friendly (2017-2020) to a
neutral one. As a consequence, we might witness an increased differentiation between submarkets both in terms of asking and achievable terms. As the majority of office occupiers are still fine-tuning their short to mid-term real estate strategies, we can expect the trend of delayed relocation and expansion projects to continue within the next quarter.
Q3 2020
OFFICE MARKET INSIGHT
The Information contained in the present document has been obtained from a variety of sources, including projections and estimations, deemed reliable. While we do not doubt its accuracy, we make no guarantees, warranties or representation about it. Avalant© 2020. All rights reserved. The information in this document cannot be reproduced, modified or used without the author's consent.
Contact us:
Hristo Andonov Director Avalant
+359-884-07-07-78 andonov@avalant.bg
OFFICE MARKET INSIGHT
Q3 2020 Sofia