The U.S. Federal Reserve’s tapering of quantitative easing and the subsequent crisis in emerging nations are raising uncertainties for Korea’s economic recovery. South Korean currency and bonds fell precipitously on concerns that the U.S. dollar could rise on the U.S. tapering of quantitative easing. Household debt has also been rising amid low interest rates. However, South Korea’s exports showed a solid upward trend on the back of the U.S. economic recovery. 

Upgrade demand increase

Attractive rates among top-tier properties continued to spur a flight to quality and help Grade A rates to stabilize. The overall vacancy rate in Seoul in the third quarter of 2013 decreased from 14.5 percent to 13.9 percent from the previous quarter.
The net absorption in Seoul’s office market during the third quarter of 2013, increased remarkably from the previous quarter to 210,242 square meters. The increase in net absorption was notable in the central business district.
This dramatic increase was primarily the result of leasing transactions involving upgrades from lower grade to prime or Grade A office buildings. Fujitsu Korea Ltd. will move from Susong Tower, a Grade B office building in the central business district, to Kyobo Life building.
Dongsung Holdings, which is leasing offices in BigwayTower in the Gangnam business district area, will move to an upgraded office in the N tower. Otis Elevator Korea moved to an upgraded office in the Two IFC building in the Yeouido business district area, occupying 7,838 square meters.
As a result, the central business district and the Gangnam business district posted a decline in their vacancy rates from the previous quarter with companies moving to an upgrade office, but the new office space in the Yeouido business district pushed up the vacancy rate in the area.

New supply impact

In the central business district area, the Doryumdong Building (Doryum 24) was completed in the third quarter of 2013. However, this Grade A office building does not have significant impact on the central business district market. It will be leased by Kim & Chang for the company’s headquarters. Thanks to significant prelease commitments by Kim & Chang, the Doryumdong Building’s occupancy rate reached 80 percent and the remaining 20 percent will be sub-leased out.
In the Yeouido business district, the Federation of Korean Industries building launched during the third quarter, adding total of 168,681 square meters to the market. Fourteen floors (approximately 16,000 square meters) of the FKI building will be leased to LG CNS.
However, this new supply exceeds the Yeouido’s current capacity for absorption. In addition, Construction of Parc 1 in the Yeouido business district has been on hold, but it is getting back on track. The Yeouido business district is likely to experience the weakest growth of the three markets, as a result of rising vacancy rates due to the supply of the Federation of Korean Industries building as well as the Parc 1 project.

Outlook

New supply is entering the central business district and Yeouido business district markets. In the cenrtal business district area, various Cheongjin office development plans are scheduled to come on stream in 2014. Opportunities abound with availabilities are expected to peak in the central business district and Yeouido business district this year and next year.
With such great opportunities for potential tenants given the market conditions, occupiers will actively review relocation from lower grade to prime office buildings. Thus, despite the sluggish economy, it is expected that the demand for office space will remain healthy.

This article was contributed by Cushman and Wakefield Korea, the local unit of the New York-based global commercial real estate consulting firm. The opinion reflected in the article was its own. ― Ed.