Sofia Office Construction: The Beat Goes On (For Now)

Written by Yasen Georgiev and Dragomir Belchev, EPI – EECFA Bulgaria

Bulgaria’s non-residential construction is set to grow in 2019 and 2020. The positive figures in the latest EECFA Bulgaria Construction Forecast Report are backed by, among others, the accelerated growth in office construction which is to witness the completion of many big projects in 2019-2021. The question is not on whether their delivery will impact the segment, but on how.

NV Tower, Balkan Business Center (left), Sky Fort (middle), Synergy Tower, Sofia Tech One,  Advance Business Center (right); Sources: www.markan.bg, www.advancecenter.bg, www.capital.bg, http://www.aaa.bg

As shown by the 2019 Summer EECFA Bulgaria Construction Forecast Report (which can be purchased here), non-residential construction in the country is to be on a growth path in 2019 and 2020, a major driver being office construction. After bouncing back in 2017, and keeping the momentum in 2018, it is relishing a real revival and is predicted to increase by over 10% on average in 2019-2021.

Office-related construction is mainly concentrated in Sofia where all major projects are located. The city is an attractive destination for companies that benefit from a favorable mix of skilled young population, competitive labor costs and rent levels to establish and expand in spheres linked to Information Technology, business process outsourcing and shared services. Companies in these sectors are active in relocations, often driven by their expansion plans and/or the rising preference of their employees for modern office premises.

Existing office space in Sofia totaled 2mln sqm at the end of 2018. In H1 2019 it witnessed the delivery of 100 000sqm and now looks forward to another 400 000sqm with an expected completion till 2021.

These dynamics are fueled by the peak in permitted office space registered in H2 2018 – an all-time high performance that by far exceeded the pre-crisis record of H1 2008 (265 065sqm).

In H1 2019 another 129 545sqm were permitted, which is still a rise of more than 90% y-o-y. It remains to be seen whether this data on permitted floor space will translate into the size of started office premises and, later on, in the number and volume of completed ones. H2 2015 recorded the peak in terms of started office floor space so far and if it is to be outperformed, H2 2019 and H1 2020 seem to be the perfect timing.

Against the backdrop of the latest development, the question is not on whether the delivery of all projects in the active pipeline will impact the segment, but on how. Demand is awaited to see logical limitations in the future because of skilled labor shortage being on the rise, the increased application of AI solutions and the changing behavior of office employees in favor of more flexible and remote work.

This altogether should keep the present rent levels in Sofia, or even put them under pressure. Rents did not considerably change over the last years and even now continue to be among the lowest in the CEE region. Thus, provided that all projects are delivered, office yields will be questioned. This scenario seems increasingly possible unless a new wave of major restructuring and cost-cutting takes place in countries with higher labor costs.

Serbia’s office trailing on beaten path

Written by Dejan Krajinović, Beobuild Core D.O.O., EECFA Serbia

office
Left: Business Garden; Top right: Sirius Business Center; Bottom right: Green Heart Source: Beobuild Core D.O.O.

Office has been struggling to sustain steady growth as its output performance surprisingly meandered in the previous period. Finally, investments are picking up, but will it be enough to improve market conditions?

Office construction

Although Serbia’s office segment has been enjoying positive developments during the ongoing expansion, its performance has been rather bumpy and below market expectations. The initial strong recovery of construction outputs in 2016 had a short breath and corrected back by a double-digit margin in the following year. This was not expected in any way since permit numbers continued surging unabated, while investment-wise all market conditions improved further.

Find out more about office construction in the EECFA Serbia Construction Forecast Report. Sample report

The sudden decrease in 2017 was largely caused by the delay in two major planned projects in Belgrade which had received their permits, but construction start did not follow as planned. With its small base and still recovering outputs, this was enough to produce a significant delay in new deliveries and sway outputs of the entire segment.

Serbia-office
Weak office stock growth during the last decade – Source: Beobuild Core D.O.O.

Unlike other regional centers, the Belgrade market is still underdeveloped and substantially behind in stock size owing to a delayed transition and the lack of institutional funds and developers from the EU that already invested in Central and Eastern Europe. Because the downturn of 2008 and 2009 reduced financing, most office projects have been developed in a pre-leased manner, thus keeping vacancy at a constant low and rents at a stable high. Consequentially, the costs of renting class A office in Belgrade can go 40% higher than its regional peers such as Zagreb or Sofia.

The construction of office buildings has again accelerated in 2018 and 2019, and the project pipeline is slowly entering realization, meaning that new deliveries should start increasing the modern stock by a significant rate in the coming period and vacancy could also temporarily increase. Having in mind the very propulsive take-up figures in the last three years, there is no fear of a prolonged vacancy at the moment. Belgrade is the largest market and there was only 10.000m2 of new stock delivered in 2018, making a tiny contribution to the total of 860.000m2.

On the other hand, several larger projects entered realization in the same period, so another GLA 120.000m2 is under construction in Belgrade and will enter the market in H2 2020. The gap between demand and supply is already very wide and although bigger projects entered construction, it will take time for new offices to become available. Furthermore, most new projects will be leased before or during construction, so, the effect, if any, on the rent costs should be very limited in this cycle. Pressures on the demand side are set to remain strong in mid-term, so more investments will be necessary if Belgrade is to keep its regional competitiveness.

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