Worst is over for commercial property market in S. Korea: real estate service provider

March 4, 2024

South Korea’s commercial property market has hit bottom and transactions of commercial buildings are likely to revive if the nation’s central bank gives a clear indication of cutting its key interest rate, according to a senior executive at CBRE, a global commercial real estate services company, Monday.

Lim Dong-soo, managing director of CBRE Korea, projected demand for office spaces will remain steady in South Korea this year amid increased liquidity in the investment market.

In a recent interview with Yonhap News Agency, Lim said the rebound will take place once central banks in the United States and other countries begin to cut interest rates this year.

“The first rate cut will be likely in May,” Lim said citing a recent CBRE report, without elaborating further.

“Lack of supplies (in the domestic office market) in the past several years has pushed up office space rental fees and driven down office vacancy rates, which is generally positive for the commercial real estate market,” he said.

According to the CBRE Asia Pacific Office Occupier Survey, the percentage of companies expecting to expand their office size jumped to 61 percent in 2023 from 43 percent a year earlier, while the proportion of firms planning to reduce their office size fell to 30 percent from 37 percent.

Based on the high return to office rate in Seoul after the COVID-19 pandemic, demand for expansion is set to continue along with the need for flight-to-quality relocation, the survey said.

In particular, Seoul Grade A office rents, which have registered high double-digit annual growth since 2022, are expected to continue rising this year. Intensifying competition for space due to limited supply will likely push up rents throughout 2024, CBRE said.

In other factors that will buoy the commercial property market, “Korean companies (traditionally) do not prefer to see their employees working from home so many workers have returned to the office following the pandemic,” Lim said.

And local companies increasingly operate offline stores in order to strengthen their brand awareness and promote their products rather than to increase sales, he said.

CBRE also forecast offline retail, which had been stagnant during the pandemic period, will report solid growth this year due to consumers’ increased thirst for experiences over the last three years.

As the overall floating population increases, the retail vacancy rate in major commercial districts in Seoul will gradually decline after reaching its peak in 2021 and will continue to recover to within 10 percent levels seen just before the start of the pandemic, the company said.

As for the emergence of Seongsu and Hannam in Seoul’s retail market, the manager said there seems to be no districts that can replace Seongsu in eastern Seoul and Hannam in central Seoul.

Seongsu is experiencing steady growth, helped by trendy cafes and restaurants, and is expected to become a major commercial district hosting unique brands and emerge as a hub for pop-up stores, CBRE said.

Strong growth will also be observed in Hannam, which hosts numerous premium fashion brands preferred by the MZ generation and is supported by purchasing power from nearby high-end residential areas, it said.

The MZ generation refers collectively to millennials, who were born in the early 1980s to early 1990s, and Generation Z, born in the mid-1990s to early 2000s.