“They said, ‘We’ll lease the whole building for 10 years’ - then came the shock... Seoul CBD offices hit by public agency relocations [Real Estate A to Z]”

Jongno and Jung districts account for 44% of employees in scope
Blue-chip tenant once expected to stay for 10 years
Five-year exit makes a premium discount inevitable
Law-firm hubs Gwanghwamun and Jongno also face fallout

The government’s plan to relocate ministries and public institutions outside Seoul has emerged as a new variable in the downtown Seoul office market. It is now uncertain whether buildings with government agencies as tenants will continue to generate rental income after their leases expire. Some expect that if financial regulators also relocate, demand for local offices from law firms with extensive government-relations work could increase.

According to Realytics, a commercial real estate information provider, a full relocation of all 125 public institutions in Seoul, which had 69,005 employees as of last year, could create up to approximately 313,700 pyeong of vacant office space in the Seoul market, equivalent to 2.54% of the total. Realytics estimated that each employee requires approximately 4.55 pyeong of gross floor area, applying the average office net-to-gross ratio of 55% to the actual space used per person, or 2.5 pyeong of net floor area. Even assuming that only 60% of the employees concerned relocate, approximately 188,200 pyeong of office space, or 1.53%, would become vacant.

The impact is expected to be concentrated in the central business district (CBD), including Jongno and Jung-gu. That is because 30,744 employees at 31 institutions, or 44.6% of the total workforce concerned, are concentrated in this area. Under a scenario in which all institutions in the CBD relocate, 140,000 pyeong of office space would become vacant in the district alone, equivalent to 5.3% of its total office area of 2.64 million pyeong.

A Realytics representative said, "In the CBD, the departure of public institutions could coincide with new office supply, potentially doubling the vacancy burden compared with other districts. Once the institutions and relocation schedules are confirmed, it will be necessary to assess the impact down to the individual building level, taking into account whether each institution owns or leases its headquarters and how much space it actually uses." The analysis represents the maximum potential impact, calculated on the assumption that all employees listed in the "total number of employees" disclosed on ALIO, the public institution management information system, work at their institutions' Seoul headquarters.

The relocation of public institutions is also being cited as a factor to consider in the sale of downtown offices. RENE Square in Jung-gu, Seoul, is a case in point. After a sale fell through once in May, the building signed a whole-building lease with the Serious Crimes Investigation Agency on the condition of a five-year lease followed by a five-year extension, and restarted the sale process in August. However, the government's announcement on September 3 that the agency was among those slated to relocate to Sejong introduced uncertainty. Industry sources believe the seller is seeking a price of more than KRW 700 billion. Others estimate a likely transaction price of around KRW 670 billion to KRW 680 billion, taking the yield into account.

The announcement of the agency's relocation means that a high-quality, whole-building tenant, once expected to stay for 10 years, could now leave after just five, making a discount to the property's premium unavoidable. Industry sources say that if the lease is not extended or the leased area is reduced, the landlord may have to compete to secure tenants with new office buildings coming onto the market when the lease expires. A commercial real estate industry official said, "There is a considerable difference in how an asset is valued with a 10-year lease versus a five-year lease. A tenant expected to leave in five years is a burden for a prospective buyer, so the premium may be discounted."

Large offices in Gwanghwamun and Jongno are primarily leased by law firms and related companies with extensive government-relations work. Kim & Chang has offices in the Gwanghwamun area, including in Se Yang, Jeokseon Hyundai, Northgate, Centerpoint, Crescendo, and Jeongdong Building, while Yulchon is based in D Tower and Grand Seoul in Jongno-gu. Bae, Kim & Lee is located in Centropolis in Jongno-gu, and Lee & Ko is based in Hanjin Building in Jung-gu. Industry sources say that further relocations by major ministries could diminish some of the advantages of a downtown location close to government agencies. If financial regulators also move to Sejong, large law firms will have greater incentive to deploy regulatory advisory and government-relations staff locally.

"A large law firm attorney said, "If the Financial Supervisory Service, which directly enforces regulations, relocates to Sejong rather than the Financial Services Commission, which formulates policy, law firms will consider setting up local branches in the form of satellite offices or smart offices, focusing on financial regulatory advisory and government-relations staff." Centerpoint Gwanghwamun, where Kim & Chang agreed to lease 80% of the total area through 2031, changed hands in October last year for KRW 432 billion, one of the highest prices in the district. The acquisition was justified by stable rental income, as Kim & Chang held an option to extend the lease by another 10 years. An investment banking industry official said, "At the time of the transaction, people thought relocating government offices would be easier said than done. If the possibility of an extension after 2031 becomes uncertain, the calculation of long-term rental income itself will change."

In regional office markets, where public institutions relocating from the Seoul metropolitan area are setting up, private companies that do business with those institutions are generating new demand for office space. In Jeonbuk Innovation City in Jeonju, the regional office market has benefited as domestic and international asset managers have opened offices one after another since the National Pension Service's Fund Management Headquarters relocated there in 2017. An investment banking industry official said, "Because performance differences among asset managers are not significant, the evaluation item for having a Jeonju branch and staff effectively determines who wins or loses, prompting a rush to set up offices in Jeonju. The National Pension Service fund is expected to grow from around KRW 1,500 trillion this year to approximately KRW 1,900 trillion by 2030, so asset managers will continue to head to Jeonju."

This content was produced with the assistance of AI translation services.