Anton Slavtchev, Principal and Managing Director, on the global and local trends in 2023
Avison Young is a global commercial real estate company that creates real economic, social, and environmental value, powered by people. The company believes in developing real estate for real impact, and is built on the belief that commercial real estate is not just about buildings and square meters. It is about the spaces and places that improve lives and help businesses thrive for the people and communities they serve. Headquartered in Toronto, Canada, Avison Young is present in 17 countries (and counting) and has about 5,000 real estate professionals in 100+ offices across the globe. We talked to Anton Slavtchev, Principal and Managing Director of Avison Young in Bulgaria, to learn what the company thinks of the Bulgarian commercial property market in 2023.
What are the defining trends in real estate globally in 2023?
According this year's traditional paper by Avison Young "The global 10 trends influencing the commercial real estate decisions around the world," some of the trends influencing real estate strategies and business decisions are:
• The increase in interest rates. We are entering a new era for commercial real estate pricing. Combined with the inflation and cost of construction, it is changing commercial real estate;
• (De)globalization 3.0: After the post-pandemic risk reduction and climate change, the war in Ukraine is driving further re-shoring, near-shoring, and friend-shoring;
• Operational excellence: Today real estate is increasingly service and experience oriented. Mainstream asset classes require more operational intensity and investors are targeting niche sectors with a greater focus on what goes on inside the building. The global markets are now interested in retirement/assisted living, new energy infrastructure, healthcare, and data centers.
Another factor is the ESG, with the focus switching from the E (Environmental) part to the S(Social) one with topics such as revitalization of cities, cost of living, technologies and their use.
What does the Bulgarian market look like? How does it compare to other CEE countries?
The changes in the Bulgarian market are linked to the changes and evolutions in the Western World, but we have our local specificities. For example, Bulgarian interest rates are lower than in Western Europe and almost half of those in Central Europe. In theory, our real estate developers should be in a better position to lend money and construct new buildings. The prime yields of office, retail and industrial real estate in Bulgaria are respectively around 7.75%, 7.75% and 7.5%. In Czechia they are respectively 5.00%, 6.00% and 4.75%. We clearly see the difference in attractiveness and the readiness of investors to pay more for assets in CEE than in Bulgaria. This is also confirmed by the markets' volume. The real estate investment market for the first half of 2023 in Czechia, Slovakia, Hungary, Poland, and Romania was 2.2 billion euro, while in Bulgaria it is less than 100 million. Even in a decreasing market, the Bulgarian market represents less than 5% of the CEE investment market. It is an example of one of the global trends I mentioned earlier – if you are looking for mainstream investments, probably this is not the most obvious place because it lacks volume. However, if an investor has a detailed understanding of the underlying business that creates the income stream, Bulgaria is an attractive place to invest in real estate. For example, most transactions with office buildings recently were by companies buying for their own use.
What is the best performing sector in business properties in Bulgaria: logistics, retail or office real estate?
Each sector has its attractiveness. Investments in retail parks have become attractive lately as the cost of construction and operation is lower, and it is less risky to build them in smaller cities. The closing of shopping centers during the Covid-19 pandemic left bad memories for both investors and retailers. The changes in habits also affected office buildings – hybrid work made investment in office buildings less attractive. This will be felt much more in the future when demand for office space will resume. Logistics can be also attractive if the developer/investor knows their business well. Some of the biggest investment transactions in Bulgaria last year were with logistics facilities.
What types of companies are the most active in renting offices in Bulgaria?
The biggest office users in Bulgaria are IT and BPO companies, but they now embrace the hybrid model of work and have reduced the space they use. However, the demand for office space is still there: over 100,000 sq.m of office space was transacted in the first half of 2023. Most of those were due to companies prolonging their lease contracts. Now we have a fight for quality, not for quantity. As a result, some locations and projects increased their rent levels.
Regarding the supply, the developers reduced the future supply by postponing new investments in office buildings. Very few projects were started in the last 2-3 years. I think the focus in the next few years will mostly be redevelopments and transformation of existing projects.
In the end, we can only guess where the balance between the demand and the supply will be. However, the sooner office employers determine their long-term space requirements through in-person and hybrid work schedules, the likelier office demand will increase.