Is it tenants’ market or landlords’ nightmare?
By Kwaak Je-yup
It is a great time to shop for a glitzy new office at a bargain, and tenants are certainly taking advantage.
Newly-finished and semi-complete office towers in Seoul’s business districts are changing not only the capitals’ skylines but also the rent price level _ downward.
Landlords behind these glass-walled temples may be big-name asset management companies or real estate developers, but they are forced to throw unprecedented perks at prospective tenants to lock in deals.
“We can confirm that there are extra benefits on offer to attract tenants,” said a research analyst at a real estate services provider, who spoke under condition of anonymity due to the issue’s proximity to the firm’s clients. While she declined to discuss specifics, she said prices have recently decreased with many clients wanting to move.
In the third quarter of this year, the addition of new buildings pushed the vacancy rate in Seoul’s Grade A building market up to 11.6 percent, according to real estate service provider Savills. Only a quarter earlier, the vacancy rate in Seoul’s Grade A building market stood at 5.23 percent, according to Colliers, a commercial brokerage.
“(The) total demand is not great enough to absorb the abundant new supply recently added to Seoul’s Grade A office market,” said the study.
It is a grim turn of events for real estate developers, who had intended to capitalize on the shortage of top-level office space; the second quarter vacancy rate actually came down from the 7.13 percent recorded at the end of last year.
As the rate was only 1 to 2 percent in 2007, it caused a construction rush, which ended up backfiring with too many players and buildings to go around.
When the statistics focus on just the Central Business District (CBD) in downtown Seoul, colloquially called the Gwanghwamun area, the problem becomes direr _ the percentage leaping up to 18.8 percent, according to Savills. Jones Lang LaSalle’s and Colliers’s counts are not too far behind, at 14.9 percent and 14.7 percent, respectively.
If there are losers, there are also winners: chaebol and multinationals are snapping up these lucrative spaces at bargain prices, with benefits previously unheard of.
SK Engineering & Construction signed a lease to move to a 65,000 square meter space at Mirae Asset’s Jeodong Tower with a 17-month rent-free period. It is still supposed to be half-empty.
Mirae Asset’s other development Center 1, next to Cheonggye Stream in central Seoul, is also looking for tenants with comparable deals and vacancy rates. Even press agencies like Yonhap and The Associated Press were able to build their nests there. The rent per 3.3 square meters, as is the custom here, for Center 1 has fallen from 130,000 won to just over 100,000 won since its opening a year ago.
The Twin Tree Towers, located right in front of Gyeongbok Palace, begrudgingly agreed to an undisclosed, disadvantageous contract with Daelim Construction, as the building was suffering from a whopping 70-percent vacancy rate even after opening. Daelim is moving its headquarters from its current Yeouido location to the new 42,000 square meter lot.
Signature Tower, also located around Cheonggye Stream, KT&G Seodaemun and State Tower Namsan, backed by Shinhan BNP Paribas are known to be completely empty, with a 100-percent vacancy rate. The State Tower Namsan, located next to the Shinsegae Department Store’s main store and the Third Mt. Nam Tunnel, had initially called for prices over 150,000 won per 3.3 square meters to no avail.
Meanwhile, Gangnam, the third business district popular with technology firms, has seen different fortunes, with a vacancy rate of 2 percent in the third quarter of this year. About 13,000 sqaure meters of space was snapped up in the Gangnam Finance Center in Yeoksam-dong, southern Seoul, in the first half of the year.
The outlook for next year is mixed.
With additional buildings entering the market in the next 18 months, office space vacancy is expected to remain high. Add that to the uncertainties of the global economy, and real estate analysts say it is difficult to predict what will happen, one way or another.
“We don’t agree with other companies’ projections that the market’s reached a trough,” said one real estate specialist who requested anonymity citing the issue’s sensitivity to his company and clients. “Our indicators say prices are going to fall even further.”
But another leading researcher in the field said the market will stabilize.
“50 percent of the tenants for new buildings will come from those occupying old buildings; the other 50 percent will have to come from companies’ expansions,” she said. “We think this is possible in the next year."