"Even as Rents Rise, Companies Head to Gangnam"... Q3 Vacancy Rate for Grade A Offices in Gangnam at 1% [Real Estate A to Z]

CBRE Korea: Seoul Commercial Real Estate Market Report

Vacant space in large office buildings in Seoul's major business districts is being leased up rapidly. The trend is believed to reflect companies' preference for high-quality assets, as they seek to move into premium buildings with excellent infrastructure even if it means shouldering higher rents.

According to the "Q3 Seoul Commercial Real Estate Market Report" released on Oct. 21 by global commercial real estate services firm CBRE Korea, the average vacancy rate for Grade A offices across Seoul's three major business districts (Gangnam, Yeouido, and the Central Business District) was 3.1% in the third quarter of this year, down 1.1 percentage points from the previous quarter. Grade A offices are large office buildings with excellent locations and facilities.

Teheran-ro in Gangnam-gu, Seoul. Yonhap News

The Gangnam district posted the lowest vacancy rate among the three districts, at 1.0%, down 0.3 percentage points from 1.3% in the second quarter of this year. Information technology (IT) companies accounted for 67% of leasing activity in Gangnam. Cosmetics companies have also been moving from their existing offices into premium buildings. Absolve Lab, which operates the skincare brand Cellimax, is reportedly signed a lease at Centerfield in Yeoksam-dong.

The vacancy rate was 1.7% in Yeouido and 5.1% in the Central Business District, down 1.3 percentage points and 1.5 percentage points, respectively, from the previous quarter. In Yeouido, demand from financial companies was particularly strong at large buildings such as Parc.1 Tower 1 and the FKI Tower. Parc.1 Tower 1 signed a lease with Prada Korea. In the Central Business District, the Major Crimes Investigation Agency leased the entire Renesquare building in Supyo-dong, Jung-gu. That single deal accounted for 82% of all new leasing activity in the district during the third quarter.

The decline in vacant office space did not lead to a sharp increase in rents. The nominal monthly rent for Grade A offices in Seoul was KRW 41,671 per square meter. It rose 0.4% from the previous quarter, marking the smallest increase since the second quarter of 2021. New leasing volume in the third quarter totaled 117,521 square meters.

The retail market performed well in the Seongsu, Myeongdong, and Gangnam commercial districts, driven by an increase in foreign tourists. The vacancy rate in Seongsu-dong fell 2.1 percentage points from the previous quarter to 1.3%. As global brands continued opening standalone stores, JanSport, Helinox, and Kodak Apparel each opened large flagship stores in Seongsu, Dosan, and Bukchon, respectively. In Myeongdong, rents rose 10% from a year earlier as more premium pharmacies opened.

Third-party logistics providers and e-commerce companies accounted for 71% of new leases at Grade A logistics centers in the Seoul metropolitan area in the third quarter. Cosmetics company APR leased the entire Kendall Square Dangmok Logistics Park. Some facilities have also been converted from cold-storage to ambient-temperature logistics centers to reduce long-term vacancies. In the wake of recent fire incidents, fire insurance rates for logistics centers have risen 2.5-fold from a year earlier.

CBRE Korea's "Q3 Seoul Commercial Real Estate Market Report" is shown. CBRE Korea

Offices made up a large share of the investment market for property transactions. Commercial real estate investment totaled KRW 9.6488 trillion in the third quarter. Office investment exceeded KRW 7 trillion, accounting for 73% of the total.

Mirae Asset Global Investments acquired G1 Seoul in the Central Business District for KRW 1.523 trillion. MDM Asset Management purchased Pine Avenue Building A for KRW 800 billion, while Hyeonsong Education and Culture Foundation acquired Gangnam 358 Tower for KRW 445 billion. Strategic investors (SIs) accounted for 30% of large office deals worth at least KRW 100 billion.

In the hotel sector, Yeonhap Y&J acquired Swiss Grand Hotel for KRW 322.1 billion and plans to redevelop it into a residential complex. IGIS Value Plus REIT purchased Cheonghwi Building in Myeongdong, which includes retail facilities, for KRW 162.7 billion.

Commercial real estate yields rose for the first time in more than two years. In the third quarter, the average yield for Grade A offices in Seoul was 4.3%, while the yield for Grade A logistics centers in the Seoul metropolitan area was 5.4%.

"Two base rate hikes and rising funding costs have delayed some transactions and increased pressure for yields to rise further," said Choi Suhye, Head of Research and Managing Director at CBRE Korea. "With fewer transactions scheduled to close in the fourth quarter than a year earlier, annual investment volume this year is expected to fall below last year's level." Choi added, "Going forward, market differences based on fundamentals such as location and tenant stability will become even more pronounced."

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