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TRANSFORMING REAL ESTATE INTO REAL ADVANTAGE

OFFICE SPACE MARKET OVERVIEW SOFIA| Q4 2021

OFFICE SPACE MARKET OVERVIEW q4 | 2021

MARKET HIGHLIGHTS TAKE UP

NET ABSORPTION

31,500 sq. m 120,000 sq. m 15,000 sq. m 42,500 sq. m Q4 2021

ytd 2021

2.411 mln sq. m.

Q4 2021

210,000

ca. sq. m. stock of modern office space space under construction

16.2 %

ca.

vacancy rate

390,000 sq. m.

ytd 2021

AVERAGE ASKING RENTAL LEVELS

€12 - €14 €8 - €11

Vacant space

Class A

Class B

INVENTORY & CONSTRUCTION ACTIVITY The stock of modern office space in Sofia peaked at 2.410 million sq. m. as of year-end, following the completion of 14,000 sq. m. class B renovation project this quarter. As a result, the total amount of newly delivered office space for 2021 reached 192,000 sq.m., making a threefold increase when compared to 66,000 sq.m. delivered in 2020, thus reaching prepandemic levels of 2019 (180,000 sq.m.).

The total volume of office buildings under active construction amounts to ca. 210,000 sq. m., which is the lowest construction activity registered on Sofia’s office space market since 2016. Despite the pipeline of planned projects of ca. 225,000 sq.m., we witnessed only one mixed-use project of 11,000 sq.m. in the city’s central business district break ground this quarter.

Construction costs have been rising steadily throughout the year and a significant portion of the pipeline has been delivered in 2021.

Based on that, we expect construction activity to gradually diminish as ongoing projects are being completed and brought to the market.

Further, construction activity will likely drop to post 2008 levels – until at least part of the newly delivered offices are being absorbed.

INVENTORY AND NEW DELIVERIES (SQ M) 100 000

3 000 000

80 000

2 500 000

New deliveries

2 000 000

Office stock

60 000

1 500 000

40 000

1 000 000 500 000

0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019 2020 2021

0

sq m

sq m

20 000

NET ABSORPTION, VACANCY AND NEW DELIVERIES 100 000 80 000 60 000 40 000 20 000 0

sq m

(20 000) (40 000)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019 2020 2021

18% 16% Net absorption 14% 12% New deliveries 10% 8% Vacancy, % 6% 4% 2% 0%

OFFICE SPACE MARKET OVERVIEW q4 | 2021

VACANCY Vacant space in class A and B office space in Q4 amounts to 390,000 sq. m. as of year-end, which marks an all-time high for Sofia’s office space market. 42,5% of the space is allocated along Tsarigradsko Shousse Blvd, followed by 13.5% and 11.8% in Lozenets/Hladilnika and Mladost/Business Park areas respectively. As a

result the overall vacancy rate stands at 16.2% in Q4 2021 at a record-high point since 2015.

Midtown recorded an increase in vacancy by 2.4%, whereas CBD and Suburban area vacancy rates declined by 0.4% and 0.8% respectively when compared to Q3 this year.

Currently the available office space, that is

being actively marketed in both existing office buildings and projects under construction, stands at ca. 495,000 sq. m. as of year-end a 57,000 sq.m. decrease quarter on quarter.

At present, Tsarigradsko Shousse corridor accounts for 40% of all available space on the market.

VACANCY RATES (CLASS A AND B AGGREGATE) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2%

CBD Midtown Suburban

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019 2020 2021

DEMAND The commercial real estate market in Sofia registered 14,000 sq.m. net absorption as of Q4 2021, thus adding-up to a total of ca. 42,000 sq.m. of net absorption year-to-date, which marks a twofold increase compared to 2020.

Although the yearly figure is far from the pre-

pandemic levels and there is still ambiguity around most of the tenants regarding their workplace policies, we have witnessed a gradual acceleration this year, which will likely continue in 2022.

New lease acquisitions reached 31,500 sq.

m., marking a slight decrease in take-up compared to Q3 2021. The volume of new lease acquisitions for the year stands at ca. 120,000 sq.m., thus marking a 40% increase when compared to 2020.

SELECTED LEASE TRANSACTIONS IN Q4 2021 Tenant

Building

Area (sq. m)

Coca Cola European Partners

Garitage Park

9,000

Emerchantpay

GORA

2,100

ING

Infinity Tower

1,000

RENTAL RATES The asking rental rates for Class A office space, with very few exceptions, remain in the range of €12 - €14 per sq. m., while rents

for class B are still largely between €8 and €11 per sq. m. We expect the pressure on asking and achievable rent leves to intensify

CLASS A AVERAGE ASKING RENT

CLASS B AVERAGE ASKING RENT

€16

€13

€15

€12 €11

€14

€10

€13

€9

€12 per sq. m.

especially in suburban submarkets and more so in those where availability is high, like Tzarigradsko Shousse.

€8

€11

€7

€10

€6

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019 2020 2021

CBD

Midtown

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019 2020 2021

Suburban

OFFICE SPACE MARKET OVERVIEW q4 | 2021

ECONOMIC HIGHLIGHTS As of November 2021, the inflation rate based on Consumer Price Index (CPI) reached 7.3% on a Y-o-Y basis. The CPI has been growing progressively in the last 12 months and has come to its highest since 2009.

Latest figures for GDP (Q3 2021) indicate an increase of 10.8% on an annual basis, mainly due to higher inflation rates and raised consumer spending.

Foreign direct investments surpassed 1 billion Euro in October 2021 and they grew by approximately 20% on a monthly basis the previous three months. However FDIs still have to catch up to levels from last year.

The average unemployment rate for Q4 2021 had a positive trend in the country. It decreased with more than 2% over the past 12 months, reaching a rate of 4.8% in November 2021.

MARKET OUTLOOK The commercial real estate market is gradually powering back to normal as evident from the healthy increase in net absorption and new lease acquisitions, compared to 2020 levels when the global pandemic started. Although the uncertainty of COVID-19 still takes hold, our research shows major occupiers in Sofia are looking to rent additional office space and the amount of newly signed lease agreements has reached pre-pandemic levels.

On the supply side, vacant space reached the highest point in the modern history of the

office space market in Sofia. Nearly 190,000 sq.m. of newly constructed office space rolled on the market and a significant portion of that is yet to be absorbed. We expect the surplus of available office space and the current levels of lease activity to continue the downward pressure on rental levels, especially for second-tier developments and ones in less favourable areas.

Construction costs are steadily increasing throughout the year, thus speculative office developments breaking ground during 2022 is less likely.

YoY Change

12-Mo. Forecast

Average asking rents Vacancy rate Construction activity Demand

INVESTMENT ACTIVITY In 2021 the Bulgarian investment sale market did show signs of recovery although few deals were consummated. Except for a couple of minor deals no notable investment transactions were announced in Q4 and the largest one in 2021 remained the office acquisition by SAP in Q3. We saw higher investment activity in the office segment compared to 2020, with a total transaction volume of ca. €95,000,000, 80% of which were occupier-driven deals, where cash-rich IT

companies bought the facility they operate from. Qualified buyers, mostly domestic, still feel eager to acquire income generating assets, but they will not overpay. The recovery is still ongoing, although at a slower pace, and there are worries about what happens next— particularly around international monetary policy and the outlook for inflation. As interest rates are likely to end up higher, investors are beginning to fear that this may result in higher capitalization rates thus lower

property values – although this does not normally happen automatically.

MBL is maintaining a cautiously positive outlook for the Bulgarian economy and commercial real estate in 2022. We expect that the investment appetite will be mostly driven by the office and hospitality segments.

It is also likely that more and more people will eventually return to the office to be part of a team and to be more collaborative, unless we are challenged by new COVID variants.

CONTACT INFORMATION: MBL 1 Kuzman Shapkarev Str. Sofia 1000, Bulgaria T: +359 2 9888 650 T: +359 2 9888 651 E: office@mbl.bg www.mbl.bg

Vladislav Hristov MRICS Director Capital Markets T: +359 2 9888 650 T: +359 2 9888 651 M: +359 884 464 567 Е: vhristov@mbl.bg

Nikolay Neov Director Office Agency T: +359 2 9888 650 T: +359 2 9888 651 M: +359 886 292 685 E: nneov@mbl.bg

This research report has been prepared for general information only. The data herein was obtained from various sources; we do not guarantee its accuracy or completeness. © 2022 MBL. All rights reserved. Any unauthorized use or disclosure is prohibited.