Cushman & Wakefield, the world’s largest privately held real estate firm, presents the 2013 Seoul office market outlook and summarizes its key findings on three major office districts.

During the first half of 2013, the central business district, or CBD, office market showed characteristics of increases in vacancy rate due to new supply. The Gangnam business district, or GBD, has experienced an increase in vacancy rate because some IT companies are moving out of the Gangnam area.

The Yeouido business district, or YBD, vacancy rate reached its highest level in history due to the completion of two landmark towers at the IFC.

In the first half of 2013, the vacancy rate in the CBD area where new supply has been focused increased to 16.5 percent. In the GBD and YBD areas, it was 7.5 percent and 22.1 percent, respectively. Monthly rental growth continued to show a weak but steady trend due to the influence of the increased vacancy rate. Most landlords have decided to freeze their monthly rental prices during the renewal period for leasing contracts last year and early this year, providing flexible rent-free periods instead of dropping the monthly rent.

Central Seoul

The CBD office market during the first half of 2013 showed the characteristics of increases in vacancy rate due to new supply, despite a number of lease contracts being concluded. In the first half of the year, three projects totaling an approximate gross floor area of 161,323 square meters were introduced into the CBD market. State Tower Gwanghwamun, Asterium Seoul and N Tower were launched in the first half of 2013, but none has yet to attract meaningful tenants. Doryum 24 will be completed in the second half of 2013, and the project has already achieved a pre-lease contract with Kim & Jang.

Although the scheduled new supply in 2014 is much less than in 2013, various Cheongjin office development plans are scheduled to come on stream in 2014, such as Gran Seoul (Cheongjin 12-16 district), Cheongjin 1 District (KT headquarters), and Cheongjin 8 district. GS Engineering & Construction, as a master tenant, will lease all of GS Gran Seoul (Cheongjin 12-16 district), and sub-lease half of the building to other tenants in the market.

In 2015, D Tower (Cheongjin 2-3 district), and Myeong-dong 3 are the main CBD office buildings expected to be completed. Owner-occupied buildings such as Myeong-dong 3 will not need to attract tenants, but other vacant spaces will be seeking potential tenants, which will make the CBD market much more competitive.

Gangnam

During the first half of 2013, the GBD has experienced an increase in vacancy rate because some IT companies are moving out of the Gangnam area to the newly built Pangyo Techno valley. The GBD, where rent is considered relatively high compared to sub-districts like DMC, Bundang, etc., around Seoul, is losing some of its tenants. Consolidation of branches by large corporations and relocations to other buildings or districts for cost-saving reasons are more likely to be considered in such a down market.

Lower rental rates, good public transportation, and proximity to the GBD’s core area have boosted the prominence of the Pangyo area. Recently, Korea’s major gaming companies like Nexon, NCsoft and Neowiz decided to move to the Pangyo area. Although some major IT companies have began to move to Pangyo and Bundang because of the limited supply of new buildings, the GBD remained the most stable among the three major business districts in the fourth quarter of 2012. The vacancy rate in the GBD is forecast to increase, as a result of the expected relocation of game companies in 2013.

Yeouido

In the YBD, Two and Three IFC were completed, supplying 238,809 square meters of space in the fourth quarter of 2012, which is approximately 19.0 percent of the area’s prime office stock. The YBD vacancy rate peaked to its highest level in history due to the new supply. Three IFC is currently not being marketed for lease and is known to have found no tenants yet. The YBD will continue to have new office stocks. The Federation of Korean Industries Hall, with 168,681 square meters of gross floor area, will be supplied in the fourth quarter of 2013. In the YBD area, the average monthly rent is expected to decrease, despite the traditional demand for substantial office space by the financial and securities sector. Lease marketing for newly supplied buildings within the YBD will become fiercer, and as the large-sized offices set to be completed in 2013 are preparing differentiated strategies from the existing buildings in terms of building management, operation and facilities, overall quality improvement in office facilities in the YBD area is expected.

Outlook

With new supply entering the Central business district and Yeouido markets, the expected new office space supply will boost the vacancy rates in 2013 and bring tenant-favorable conditions to continue in 2013. Market conditions will require landlords to continue offering lease incentives due to the impact of new supply in the CBD and YBD. Looking ahead, although scheduled new supply is much less than before, we expect tenant-favorable conditions to continue until 2015.

This article was contributed by Cushman & Wakefield Korea. The opinions reflected in the article are its own. ― Ed.