Office market saturates rapidly

Krasimir Dimitrov Managing Partner SOURCE Real Estate Advisers Ltd.

Office space rentals market, Sofia, Bulgaria - Trends and Forecasts
In the first quarter of 2008 office space base rental levels are still rising, though the growth rate is gradually declining. This is due to the fact that demand for Class A and B++ office space still exceeds supply, mainly due to low supply.
Due to the fact that supply of office space in Sofia will sharply rise in the coming few years, it is expected that base rental levels will remain close to the current ones. Parallel to the spike in supply absorption levels are expected to fall at an increasing rate. This will lead to high vacancy rates in the projects that are not targeted and positioned well enough, especially those with a poor location/equipment/price ratio.
The abrupt swings of high and low vacancy and absorption rates in relatively short intervals of time also affect the entire market status. A few years back the market was a "buyers’" one due to supply exceeding demand as clients had significant bargaining power and were keeping rental levels low. Now, however, we have a "sellers’ or landlord market" where, due to the shortage of available quality office space, the "sellers and landlords" are in a position to demand higher base rental levels. It is expected that in as little as a year and a half, however, the market will once again become a "buyers’" one.
Even if only 50-60% of promoted developments are actually realized in the next 2 years, this will still be a significant spike in supply, considering the total size of the market and its growth rate (between 17% and 19% growth in rental demand and 20%-23% in purchases demand). The fact that many of the projects are to be completed in a short interval of time (2010-2011) may lead to oversupply, especially in certain areas. This will affect even the already operational office buildings, most of which do not meet the criteria for Class A office space, and as a result it is expected that rental levels there will slightly decrease.
In the face of such an increase in competition for tenants, low vacancy rates and high rental rates will be achieved only by the projects which offer the best location/equipment/price ratio.
Such are the well designed, constructed and managed buildings, which meet all of the international criteria for Class A office space and with a minimum of common areas included in the rented space.
Office development pipeline to 2011 in Sofia

Locations Office Space - sq m Number of projects Percentage

Tsarigradsko Shosse Blvd.	475,300	19	22
Airport	175,000	4	8
Business Park Sofia Area	144,887	9	7
Bulgaria Blvd.	202,863	10	10
Ex-factory sites	269,000	3	13
Other	862,977	48	41
CBD	142,200	9	7
URBAN	744,050	28	35
SUBURBAN	1,243,777	56	58

Source Real Estate Advisers Ltd. market research data