Seoul is still a tenant's market
Abundant new supply in Seoul’s “central business district” area continued to perpetuate the tenants’ market in 2011. How long will the tenant-friendly office market last for Seoul? The impact of new supply will lead to stagnant rent and an increase in the vacancy rate until 2014, but is expected to settle at a healthy level in the long run.
Approximately1.35 million square meters of new prime and grade A offices will be added to the market by 2016. Most of these new office spaces are located in the central and Yeouido business districts, which should drive vacancies up in these areas.
Although some of the projects have been delayed due to the global financial crisis, the completion of major projects will still take place. Thus, given expected availability and choice, tenants will actively review relocation possibilities to upgrade their office space in the coming years.
Central business district
Several real estate development projects such as the Doryumdong Building, N tower and Chungin districts will be completed by 2015. Vacancy rates in the development project areas, especially Chungin district, are expected to increase over several consecutive years.
The vacancy rate in the central business district is forecast to exceed 20 percent in 2014. Monthly rental growth is expected to remain sluggish due to the increased vacancies. The face rental rate in the area will stay stable or increase slightly by 2 to 3 percent.
Gangnam business district
As conglomerates and the IT companies showed strong demand for expansion amid a tight supply of quality space, vacancies in the Gangnam business district, southern Seoul, are expected to fall continuously.
Although several buildings like the K office building will enter the stream in 2013, the location is actually outside Gangnam’s main area. Thus, the impact will be marginal.
In Gangnam, rent for large-sized prime buildings is expected to maintain an upward trend due to sustained demand and limited new supply of quality space in the core areas.
Yeouido business district
Large-sized buildings such as the Seoul International Finance Center 2 (Two IFC) and the Three IFC are scheduled to be completed in the third quarter of 2012. In addition, the Federation of Korean Industries Hall (FKI) with 168,681 square meters of gross floor area will be delivered in the fourth quarter of 2013.
Consequently, occupancy and effective rental rates are expected to reverse course in the second half of 2012, after a prolonged period of stability.
Although the two IFC towers and the FKI buildings have set higher rent rates, the new prime office buildings will also begin to offer competitive incentives to secure tenants due to the One IFC’s pre-leasing success and its aggressive marketing approach.
Looking ahead, we expect tenant-favorable conditions to prevail in Seoul’s office rental market until some of the excess supply is absorbed. New supplies in the central district and Yeouido will likely hold back any rent uptick, but a multitude of incentives should strengthen occupancy in these new developments. Thus, leasing transactions involving upgrading from low grade to new prime office building space is expected to increase and remain widespread in the Seoul office market.
Meanwhile, the lack of new construction and healthy demand will sustain low vacancies in Gangnam and in turn, fuel moderate rent increases. Face rents in Seoul's grade A office market will edge up because of newly-completed buildings and the inflation rate.
However, with new supplies entering the central business district market, rents are expected to continue to show a weakening trend. Thus, Seoul’s grade A office market is expected to be a tenant’s market in the coming years.
Tony Yoon is senior director and head of Corporate Occupier & Investor Services of Cushman & Wakefield Korea.