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Research & Forecast Report Bulgaria | Office Real Estate Market H2 2016

Office Market Overview


Supply

Verka Petkova Manager | Office and Industrial Services verka.petkova@colliers.com

A steady 2% increase of class A and B office supply in Sofia resulted in a total of 1,920,650 sqm, offered on the market in the second half of 2016 (Fig.1). The new stock amounted to 41,257 sqm, predominantly based in class A projects. The supply of the latter increased by 5% or 3 new buildings with a total surface of 525,082 sqm. The annual supply growth was 4%, equal to 83,601 sqm.

Fig 1. Total office supply in Sofia (in `000 sqm) 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

“70% of the new office space, delivered to market, was in class A projects” “Annual net absorption* in quality class A and B buildings increased by 26% “ “Total take-up** (all transactions on the market) grew with 27%, compared to the first half of 2016” “A new office building destination in Sofia started to form” “Asking prices in class A and B projects set to remain stable”

1,539 1,378

1,649 1,686 1,748 1,837 1,920 1,570 1,683 1,723 1,757 1,879

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016

The steady high level of demand resulted in active office building construction, registered at the beginning of 2016. In reflection to that, the total stock, to be delivered to the market, amounts to 115,000 sqm in six projects, scheduled for completion in 2017. NSI statistics regarding issued building permits for administrative buildings in the first three quarters of 2014, 2015 and 2016, showed consistency in terms of number of projects, but significant changes with regard to their size. The registered growth comparing January – September 2015 versus January – September 2016 was 232% (Fig. 2).

Fig 2. Issued building permits for office buildings, Sofia (January - September)

Намерете вашия нов офис

Period

Number

GLA

Q1 - Q3, 2014

19

57762

Q1 - Q3, 2015

16

47630

Q1 - Q3, 2016

26

158263

A higher concentration of projects in Sofia Center and Broad Center was registered in the second half of 2016. A new office area started to shape up between Nikola Vaptsarov Blvd. (Office Park Expo 2000) and Cherni Vrah Blvd. (Paradise Center). This zone is considered with high potential for further development for a variety of reasons, such as availability of land for sale, good infrastructure, excellent public transportation system, including subway. The surroundings of Capital Fort and Business Park Sofia have similar characteristics.

Demand The ongoing interest in quality class A and B projects increased the net absorption of offices from 43,000 sqm in the first half of 2016 to 65,000 sqm over the surveyed period.

2

Office Market Overview | H2 2016 | Colliers International


This parameter did not change significantly in comparison to the same quarter of 2015, when it amounted to 63,000 sqm. However, a 26% growth year-on-year was registered (Fig. 3).

Fig 3. Net absorption in Sofia (in ‘000 mln) 90 80 70 60 50 40 30 20 10 0

84 76

71 63

51 38

40

34

46

65 43

23

H1 H2 2011 2011

H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016

Total take-up was 72,724 sqm, 27% more than in the first half of 2016. All leasing transactions in 2016 amounted to 130,000 sqm, compared to 112,925 sqm in 2015 and 138,300 sqm in 2014. During the surveyed period, the distribution of completed deal types was as follows: expansions within the current location or co-locations (11%), relocations (19%), renegotiations (25%), new entries on the market (2%), renewal of existing contracts (19%) and pre-leases (49%). The growth of the latter was almost triple, compared to the previous six months, when their share was only 17%. This development was due to the increased supply “under construction” along with rising interest in new buildings and the related expectations for higher quality of construction in accordance with global standards. A reflection of that is the successful positioning of the first office skyscraper, followed by the announced development of a few more (Fig. 4).

Fig 4. Demand drivers

19% 19%

11%

2% 49%

Relocation Expansion Pre-leases New entry Renegotiation

The outsourcing and IT sector kept a growing share in the total office market transactions - from 60% in the first half of 2016 to 74% in the second half. The requirements of these companies continued to include modern and functional layouts, comfortable workspace, convenient location, easily accessible through public transport, availability of restaurants, sports centers and additional services in close proximity. In response to these expectations, developers continue to plan modern buildings and multifunctional complexes – a trend noticeable in the secondary cities, as well. An example of that is Business Arena Ruse, which is the only class A office building in Ruse, part of a large-scale project, which also includes a shopping center, a hotel and a sports hall.

3

Vacancy Class A and B vacancy levels in the capital continued to decline with a slow pace. From 258,000 sqm or slightly below 14% during the first half of 2016, they shrank to 234,000 sqm equal to 12% over the surveyed period.

Rental levels Asking prices for buildings with use permit in place remained relatively stable. Offices in class A projects in Sofia Center were available for 13.5 euro/sqm, and 12 euro/sqm in Broad Center and in the Suburban areas. Asking rental levels for buildings under construction were higher - around 14 euro/ sqm, due to their communicative locations and the expected quality of the office space (Fig.5). The average rents for class B projects were about 8 euro/sqm.

Fig 5. Class A asking rental levels in Sofia (euro/mln) 15 14 12 11

12

9

2010

2011 CBD

12

12

11

11

9

9

2012

13 12 10

2013

Broad Center

2014

13

13.5

12

1212

11

2015

2016

Suburbs

Forecast »»

Pre-leases to remain as a trend, due to the high quality of the new buildings, combined with a diminishing supply of completed office projects; this to continue throughout 2017, when additional stock is expected to enter the market.

»»

Renegotiations of existing contracts to stay among the main drivers of the segment.

»»

The expansion of the outsourcing and IT sector and its reflection on the office market dynamics to be another notable ongoing trend.

»»

A growing demand for building sustainability to be among the office selection criteria, together with the need for social environment.

»»

Office co-locations to be sought for both in the capital and in the secondary cities.

Definitions: * Net absorption - the term refers to the change in occupied stock from one period to the next. It refers only to existing stock (not the development pipeline). ** Gross take-up - the total floorspace known to have been let or sold as one of the following activity types during the period: pre-lets, new occupation/lease, expansion, renewal/renegotiation, sub-lease and sale & leaseback.

Office Market Overview | H2 2016 | Colliers International


Your office in the only Class A building in Ruse Part of a modern multifunctional complex Adjacent to a shopping center, hotel and sports hall the best location in the city Easy access Planned opening – end of 2017 Investor International Company for Investment and Development

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Business Arena Ruse is the only class A office building in Ruse It is an integral part of a modern multifunctional complex, which comprises a shopping center, hotel and an operational sports hall. The gross leasable area of the office building is 11,438 sq.m. and includes 16 floors. Business Arena Ruse offers conference room facilities, underground parking for 227 cars, food courts and restaurants. The complex has one of the best locations in the city - situated on a main boulevard, easily accessible by both private and public transport. Ruse is among the five biggest cities in Bulgaria. It is located in its northeastern part, on the bank of Danube River, which ensures for an easy connection with other countries. The city is just 60 km away from Bucharest – the capital of Romania and 75 km from Bucharest Henri Coanda (Otopeni) Ariport. Ruse has a very well-developed infrastructure. It is a major road and railway hub in Northern Bulgaria and the biggest Bulgarian port town on the bank of Danube River. The latest statistics show that the population of Ruse is 145 765 people*. Ruse municipality is home to a university, seven secondary and eleven professional schools. * NSI (31.12.2015)

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Verka Petkova Manager | Office and Industrial Services +359 2 976 9 976 verka.petkova@colliers.com Lora Mitova Market Research +359 2 976 9 976 lora.mitova@colliers.com

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Office Market Overview, H2 2016