AVISON YOUNG: PRESENT AND FUTURE OF COMMERCIAL PROPERTY

The advice of an informed, experienced consultant is crucial for the investors who want to make the most of the commercial real estate market of 2024. Avison Young is a global commercial real estate company, which believes that commercial real estate is not just about profits – it helps both businesses and communities to thrive. Headquartered in Toronto, Canada, Avison Young is present in 20 countries (and counting) with over 100 offices across the world. So, what are the current trends on the Bulgarian and international market? Anton Slavtchev, Principal and Managing Director of Avison Young in Bulgaria, shares his insights.

What are the defining trends in real estate globally in 2024?

Investors in real estate are considering a large number of factors when making their decisions: social and political, such as the geopolitical tensions and war in Ukraine; environmental issues and climate change; political instability and drive of extremism; demographic trends and migration. Other factors determining the investments are specific to real estate: construction costs, land availability and land cost, cost of capital and financing, environmental requirements, etc. As a result, investors in real estate are willing to invest but are still in a "wait and see" mode. When they invest, they do it with a lot of caution. As a result, at the beginning of 2024, investments in Europe showed seven consecutive quarters decrease. In mid-2024 it looks like the market is moving into a recovery phase. Some of the reasons for this are: the stop of the increasing of interest rates; investors becoming more ready to accept that the interest rates will remain higher for longer; the significant repricing of some assets (office building prices in Germany fell by 30% compared to the peak, in Paris they went down by 14%); the lower cost of construction. However, the recovery will not happen overnight and simultaneously in all sectors and countries. It took 8 years for the market to recover from the Global Financial Crisis in 2008. Overall, the investments are driven more by the type of sector and megatrends that propose counter-cyclical behavior. As a result, investors are most interested in energy infrastructure, data centers, and healthcare, and less in hotels and industrial/logistics properties. On the bottom of their interest are the offices and retail in suburban areas.

What does the Bulgarian market look like? Are there any local specificities? How does it compare to other European countries?

In Bulgaria, most of the global trends are valid, but we have our specifics, of course. The size of our market is very small in comparison to the other Western and Central European countries. There is a positive correlation between the size of the market and the number and type of investors we can find in that market. The bigger the market is, the more investors and cross-border transactions there are. In Bulgaria, there are predominantly local small players or international capital that have been deployed through local partners.

Most years, the volume of annual transactions varies between 200 and 300 million euros. In the two previous years the volume of investment transactions in Bulgaria decreased, which is comparable with international trends. The global trends of insecurity and tension are well felt here, but additionally, we have some local issues, such as political instability, declining population, lack of transparency and predictability. Factors that positively affect investments in Bulgaria are the labor cost that is still below European levels, the underdeveloped market that offers opportunities in several sectors (retail, hotel, logistics), the growing purchasing power, etc.

How are the different sectors in business properties in Bulgaria – logistics, retail,  or office real estate performing? Why?

Retail is the sector that has attracted the most interest for a long time. The major shopping malls are owned by international investors, probably because the required investment is above the amount of money a local company can put in a single asset.

The subsegment that saw the biggest development in the last couple of years is the development of retail parks. There, the investments are both local and international and quite scattered. We should expect potential concentration in this segment in the future.

The logistics sector should be mentioned, too. The acquisitions of some logistic projects in the last years by CTP was the first sign for its undiscovered potential. In 2024, the only major investment transaction so far is the purchase of three logistic parks by Lion's Head from Bulgarian Property Development for a disclosed price of 71.4 million euros. It is good to see two international players competing in the logistics market in Bulgaria. I wish we see similar trends in other segments, offices for example.

How is the office occupiers market evolving and what are the new trends?

The office occupiers' market is one of the segments of commercial real estate with the most developments, involving investors and competition. However, the hybrid way of working makes this segment less interesting at the moment for investors, still providing many opportunities for redevelopment of existing projects.

The relationship between people and their work is rapidly evolving, requiring office spaces to adapt and actively support this ongoing transformation. The future of work is a sum of its parts – agile, hybrid, flexible, collaborative, and connected. There are classical office solutions proposed by the investors for established and mature companies, but there are also flex solutions that meet the diverse demands of the modern workplace environment. The number of flex operators and centers operated by those in Sofia is growing every year, yet the utilization of office buildings has dropped significantly since 2020 and is at 65%-70% average. The use is above 80% on Tuesdays to Thursdays and can drop below 50% on Mondays and Fridays. Does it mean that we need fewer offices? I would say – no. We do not need fewer stadiums for sports events, although there is only one match per week there. The right question is how we use the office space. For the companies, the cost of occupation is much less than the human cost. Providing the right space for people to meet, cooperate, coordinate, and create remains essential for companies to maintain the right company culture.

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