The commercial real estate market in Bulgaria is at a crossroads. All of the three commercial sectors – offices, retail and industrial – have felt the impact of the global economic downturn that started to affect Bulgaria during the last months of 2008 and continues this year.
The slowdown has hit quite differently across the various sub-segments, depending on the stages of development. The question now is how we choose to manage the situation, and what will take off when the light changes to green.
Currently the office sector is the most mature and was set for a steady growth. Now, however, it is characterised by a situation in which supply and demand are moving in opposite directions.
Demand has fallen in the second half of 2008 and doesn't appear to be picking up in 2009. The industrial and logistical market, which has been a late bloomer, is only moderately affected by the financial crisis.
The worst impact has been on the supply side, where some projects experienced delays due to financing issues, while others were simply put on hold. In general the market remains undersupplied and thus ripe for new, well-conceived projects. Retail, especially when speaking about shopping malls, has witnessed a return to sanity, with only viable projects progressing and a looming over saturation avoided.
History teaches us that, regardless of the length and the depth of a crisis, it eventually fades. That is why real estate developers have two choices now. They can view this as a temporary setback, wait for the whole thing to blow over, and then reintroduce schemes that were put on hold due to lack of financing, expecting to proceed with business-as-usual and being successful with yesterday's product for tomorrow's market.
The alternative is to spend time reflecting on the characteristics of future demand and start developing products that meet those demands.
Savvy developers will choose the latter option. They will know that if you continue to do what you have always done, you'll get what you've always got. And, at times like these, it is an approach hardly worth trying.
The key to being successful in the post-crisis world of real estate is differentiation. Differentiate or die has long been the mantra in fast moving consumer goods. There is no reason we shouldn't apply this approach to the real estate sector also. Research shows that products with a clear (demand-driven) differentiator are more resilient to fluctuations in the economy – and perform better overall.
Using green technology is an example of a characteristic destined to become an important factor in tomorrow's properties. The trend towards green buildings is a non-reversible process, regardless of the development in energy prices. The recent fall in oil prices has solely been driven by weak demand – once that bounces back, energy prices will start to rise again. Occupiers and investors care about operating costs as well as building value and return-on-investment. And all these factors are much more attractive in green buildings; in fact, they are evergreen.
And let's not forget the idea of corporate governance. This principle has been avidly discussed and promoted but, as the current financial situation demonstrates, not widely implemented. It is highly likely that in the new market situation, which comes out of the mess we're currently in, the principles of corporate governance will become much more important, and thus increase the demand for real estate that at least attempts to minimise the environmental impact.
In essence, the recipe for success has survived all fluctuations in any market. The successful developers will not be those who sit and wait for the crisis to pass, but those who are already making plans for the future. It is going to be interesting to see who they are.
*Atanas Garov is the managing director of Colliers International in Bulgaria