"We are moving office to the other side of the city," a friend who works in a small Bulgarian company complained over a coffee. "Now I am going to have to commute for an hour and a half!" I sympathised, expecting that cutting costs would mean an inferior office. But it turned out the company was relocating to a better, new building with a reduction in rent.
The Sofia office space market represents a conundrum. The Western city model of business buildings in the centre and residential property on the outskirts is turned upside down. The city lacks a proper business district: instead, many of the new office buildings are springing up close to major road arteries, more often than not on the outskirts.
Sofia is a tempting spot for multinational companies – a capital city with close to two million inhabitants, lively developing markets and a centre of trade and state administration. These circumstances have created a steady flow in the last decade of companies wanting to rent office space. The rising demand necessitated large scale building projects to accommodate the newcomers and construction companies rode the market trend in the face of what seemed like minimal risk. When the economic crisis hit Bulgaria, one of the sectors to suffer the most was construction. The drying up of capital froze many projects, but enough of the large ones continued.
In the last year the buildings planned in the 2006-2008 period, when the country experienced an influx of foreign investors and companies eager to get into the Bulgarian market, have been finished. This adds up to more than 50,000 sq.m of office space alone completed in the second quarter of 2010, according to the report of real estate consulting company Elta Consult. Only 15 percent of it is in the centre of Sofia, which is consistent with the tendency to develop business activity in the outskirts. Over 200,000 sq.m are expected to be completed by the end of the year and 100,000 sq.m more up to the end of 2011.
The official statistics do not quite match up with the reality. About 110,000 sq.m of space have already been finished, but not on paper. Many companies have completed construction, yet are holding back the release date, thus saving on taxes. Some of them have filled less than 10 percent of their capacity, though prime location buildings are better off, with a 50-60 percent rate of occupation. Small and medium office spaces between 300 and 500 sq.m are in greatest demand.
Many of the newly-finished structures seem to meet the international standards of a class A building, although offices are sometimes advertised and sold as class A based solely on their "luxurious" appearance. In reality, class A is a list of specific requirements ranging from a location not more than 15 minutes on foot from the nearest city transportation, to open office space, double flooring to allow for quick rerouting of the electrical system, fibre optical Internet connection and at least 1.7 parking spaces for every 100 sq.m of the building. Class B includes upgraded and renovated former administrative buildings which don't come up to class A standards, and buildings originally intended for residential use whose purpose changed during construction.
In Bulgaria the lowest class, C, applies to residential space used as offices with all the subsequent disadvantages, such as lack of structured cabling, bad infrastructure, no security and low flexibility of space.
Lower class property is hardly attractive to tenants despite the low rent rates, as consulting company Elta Consult points out. Its problems of technology and presentation are detrimental to many businesses, who relocate from older office buildings to new projects and demand higher specifications and standards. However cheaper the lower class office is, the long-term costs of upgrading and maintaining it are often higher than leasing a modern and efficient space.
The flood of newly-completed class A office space keeps prices down, and further depresses the market for the lower classes of office. At the moment a class A office in Sofia fetches about 13 euros per sq.m, pushing prices down to 7 and 4 euros per sq.m for the B and C classes respectively. This is in sharp contrast to price levels before the start of the economic crisis, when class A space went for 18-20 euros per sq.m and prime locations in the city centre rented for as much as 26 euros per sq.m.
These favourable conditions are about to change. According to a survey, almost a third of large-scale office renters are considering relocation. This trend is already coming on stream, and relocations have accounted for a large part of the market revival in the past few months. This, together with the increased number of class A office buildings on offer, has slowed down the price drop. Consulting companies expect that the demand will keep rising for the rest of 2010, and so the time to relocate or choose a new office is now. A new lease will also give you an opportunity to negotiate the terms to your advantage in the face of the oversaturated market, as well as helping you save on energy bills with a newer, “green” building that meets energy efficiency standards.
When looking to rent an office, get to know the specifics of the building and check how many of the options really match the existing class A requirements. Sufficient parking space is a must, as well as a flexible, open plan layout. Aside from the location, pay special attention to the heating, ventilation and air-conditioning systems – they should not only provide the right temperature, but also renew the air in the building. Structured cabling, which delivers information flow to every device or computer system, is especially important and should be at least category 5. Make sure the building has an emergency electricity generator, in case of power failure, and fire safety and protection systems that minimise fire damage. If you want to keep your employees happy, consult their opinions as well and include them in the distribution of space and work stations.
If you are looking for an excellent location, ample parking and good infrastructure, it's worth checking out BNK's Europe complex. In building 15 tenants receive spaces completed to their own requirements, with heat insulation up to European standards and food and fitness facilities in the complex. Proximity to Sofia airport as well as the major city arteries makes for a great location 15 minutes from the city centre.
The Perform Business Centre offers its tenants prestige, class and comfort combined with modern facilities and the latest in technology. The building was designed by Italian architect Leonardo Celestra which, together with its high-quality materials and ideal central location at 2 Positano St, makes it a cut above the rest. The four-façade building has 18,000 sq.m of office space on eight floors and can accommodate up to 405 vehicles in five underground parking lots.
Prime office property outside the capital offers lower rent prices and good transportation connections. The main Black Sea coast cities are developing at a rapid pace and a steady number of foreign and Bulgarian investors have set up headquarters there. This necessitates the building of high-quality office buildings such as business centre Vaya, a class A administrative and trade building in Burgas. Its spot in the city's developing southern regions allows for fast travelling and a gorgeous view of the Burgas Bay and the Vaya lake. The business centre offers 67 offices with a total of 2300 sq.m area, a parking lot and a panoramic restaurant.
Business Park Varna, which is situated at one of the main city entrances and five minutes away from Varna airport, offers class A offices for small and large companies. When the Park is finished, it will consist of 8 modern buildings with a total floor area of 200,000 sq.m, including more than 2,000 parking spaces. Three of the buildings are already in use. Technological advantages include independent power supply, satellite communications and electronic access control. Tenants of the complex have at their disposal food establishments, bars and banks, and they can also decide the office space layout according to their needs.
Regardless of property vacancies at the moment, prices will not experience a significant drop, so take out your lease without delay. According to Elta Consult, leasing activity and take-up rate will increase when the economy starts to recover, but considering the large amount of vacant space and the huge pipeline for the next year it will take at least another 2-3 years to fill the vacant offices in Sofia.
Tight budgets and significant cuts in planned projects mean there are no new developments starting at the moment. Existing space will be appropriated by the companies in the next couple of years. The property market is stabilising, from which point rents will slowly start going up again. This anticipated tendency is why developers hold back their completed projects. For the client hunting for a property, now is probably the time to find the lowest long-term rents for office property that we are likely to see for the next few years.