Unlike the residential sector, where the property cycle tends to see abrupt fluctuations in supply, demand and pricing, the office property market follows a smoother curve of development, making it more predictable.

In 2007 the growth of office space in Sofia continued its upward trend and saw an increase of 28.92 per cent compared with 2006, or about 158 000 sq m of additional offices, according to the latest research by Colliers Bulgaria. Currently, the total inventory of multi-tenant and speculative class A and B office space in the capital was 704 600 sq m. By the end of 2007 the existing stock of class A offices in Sofia reached 369 600 sq m. New supply in the second half of 2007 was mostly driven by suburban development, which accounted for 66 per cent, or 64 000 sq m, of the total new office stock. Because of the lack of land for office developments in central areas, the suburban region will remain the main driver of supply in the future.

The existing office inventory is almost fully occupied and the new supply seems insufficient to meet current market needs. Vacant space declined during the past six months to less than four per cent of the total office supply.

As a result of the low vacancy rates, rent levels continued to grow in the second half of 2007.

The increase was most notable for class A properties where rents went up in all sub-markets, reaching an average monthly level of more than 15 euro a sq m. In the central business districts, rents grew at a slow but steady pace, continuing the trend of previous years, and averaged 17 euro a sq m for office space. The highest annual increase in asking rents for class A, 22 per cent, was in the broad centre.

Net absorption was 161 000 sq m in 2007, surpassing expectations. This was a 58 per cent increase on 2006's level of 101 500 sq m.

Colliers's specialists said that the high absorption volume was likely to be sustained in the foreseeable future, driven by the growing number of multinational companies expanding their operations and needing to relocate and local companies increasing the scope of their activities and requiring larger office space. Lease transactions were expected to increase both in number and size.

Despite the growing number and size of projects in the pipeline, vacancy rates were not expected to grow significantly until the last quarter of 2008, Colliers analysts said. The real increase in supply will be in 2009 when several large-scale projects will be completed - Megapark, Serdika Business Centre, Benchmark Centre and the first phase of Sofia Airport Centre. Until then, there was likely to be a shortage in the market. Rents levels were not expected to increase significantly in 2008 as the new deliveries were, to a large extent, pre-leased.

Other estate agencies, though, argued that the relocations of large companies often involved long-term planning. Many of the buildings currently under construction were marketed and pre-leased before completion, which accounted for the quoted high take-up levels. Once the effect of these commitments or pre-sales was accounted for, demand would restore its normal levels. The average annual demand for office space in Sofia was 55-62 000 sq m, increasing by 10 to 15 per cent year-on-year, Krassimir Dimitrov, managing director of Source Real Estate consultants, said.

By the end of 2007, more than 590 000 sq m of office space was under construction, with more than 70 per cent in suburban areas, according to Colliers research. This did not include developments in the planning stage. Including this would take the amount of new office space to more than 600 000 sq m.

Deyan Kavrukov, head of Bluehouse equity fund and a former partner at Equest, said that over the next three years about 620-640 000 sq m of new office space would be built and even if the annual absorption rate peaked at 90 000 sq m, a significant amount would remain vacant. This was not helped by the fact a large number of international companies had decided on Bucharest as the location for their expansion into South East Europe, meaning Sofia lost out on a number of tenants. Companies chose Romania over Bulgaria as the Romanian market is larger and the country introduced more favourable tax reforms for business earlier than Bulgaria. There were also more flexible construction and zoning regulations in Romania and construction happened faster in Romania.

In the short and medium term, the market for office space in Sofia has good potential for further development; demand is still outpacing growth in new space.

The market in Sofia, with 7.2-7.5 per cent annual returns, has not yet reached its capacity. However, some of the larger players on the market, like the Dutch TKP Pensioen Real Estate Fonds - which claims to be the biggest property fund in Europe with investments of more than one billion euro, are not interested in the market because of its future over-saturation and "because prices of class A offices in some of the CEE countries have reached those of established markets such as Paris and Munich".