The Seoul office building market is in turmoil. As mega buildings are being completed one after another in the city center and Yeouido, the office rental market is experiencing a double whammy of increasing vacancies and falling rents, causing a tectonic shift.

The office vacancy rates in Seoul's downtown, Gangnam, and Yeouido areas in the second and fourth quarters of 2014 were 15.8%, 13.4%, and 17.3%, respectively. These are all higher figures compared to the vacancy rates of 12.5%, 12.9%, and 14.1% in the same areas in the second and fourth quarters of 2013.

The reason for this increase in vacancy rate is that the demand for office space has decreased due to the economic recession, and tenants have noticeably increased the number of cases of reducing the usable area or relocating to areas with relatively low rents depending on their circumstances.

Another cause appears to be the accumulation of vacant spaces as existing vacancies have not been resolved in a short period of time due to the deterioration of the rental market.

This downward trend in the office market is likely to continue in 2015. This is because corporate demand for office space is shrinking due to the overall delayed economic recovery, and the effects of oversupply are expected to add up.

It is also expected that the restructuring of the financial sector, including banks and securities firms, will have an impact as they move to reduce their office space. 

Office supply continues to grow, but it is questionable whether there will be enough demand to fill this space. With the recession, companies are increasingly reducing the size of their offices, while there is no new growth engine to expand office demand.

This is not the only factor in the decline in demand. The relocation of public institutions in Seoul and the metropolitan area to the provinces is expected to continue next year, which is expected to have a significant impact on the office market.

Accordingly, next year, as the vacancy rate of office buildings in major areas of Seoul increases, the pressure to lower rents is expected to increase. In particular, some buildings with weak competitiveness will see a large outflow of rental demand, accelerating the increase in vacancies and decrease in rents.

However, the sales market is expected to show a different pattern. Next year, the office market is expected to show a more distinct 'decoupling' between leasing and sales. The leasing market will show a double whammy of rising vacancy rates and falling rents, but the sales market is expected to remain strong.

Building sales prices plunged after the global financial crisis in September 2008, but began to rise in the second half of 2009 and have continued to this day. It is expected that this upward trend will continue in 2015.

The reason why buildings are so popular as investment products is because they have established themselves as a representative safe asset. In the process of overcoming major crises such as the 1997 foreign exchange crisis and the 2008 global financial crisis, the perception that 'building prices do not fall much in the long term' has taken hold among investors. Accordingly, both institutional investors and individual investors rank buildings as the most preferred investment item. 

Also, most of the wealthy people these days are including buildings as a must-have in their asset portfolios. In the past, you had to own at least one apartment in Gangnam to be considered rich, but these days, owning one building is considered a measure of wealth.

In this atmosphere, the upward trend in the building sales market is likely to continue for a considerable period of time.

However, it should also be noted that it is difficult to achieve a V-shaped rise like in the past. Instead, it is expected that in the future, even if prices rise, they will likely draw a gentle upward curve that combines an 'L' and a 'U' shape. 

Original link: http://www.newsway.co.kr/view.php?tp=1&ud=2014121608154720093