“Tenants sometimes come to visit us, but it is difficult to sign a contract because they impose strict requirements, such as a reduction in rent or a guarantee of ‘Rent Free (free rental for a certain period of time).’” 

Mr. Kim (64), manager of the S Building management office located on a side road near Yeouido Station in Seoul, has many nights having trouble sleeping these days. This is because the three floors of the S Building, which became vacant last summer, have been vacant for seven months. Even though we offer various benefits, such as reducing rent and not charging fees for using various amenities, no one comes to visit. Mr. Kim said, “A few years ago, rent was expensive due to a lack of office space, but now the atmosphere has changed 180 degrees. “As new office buildings are being built one after another in good locations, it is difficult for small and medium-sized buildings like ours to fill tenants,” he confessed. 

The office building market in Yeouido is fluctuating. As mega-scale buildings such as the Seoul International Finance Center (IFC) and the Federation of Korean Industries are being completed one after another, they are suffering from the double whammy of increased vacancy and falling rents. 

Remax Wide Partners, a building specialist, surveyed 127 office buildings in the Yeouido area in the fourth quarter of last year and found that the vacancy rate reached a whopping 17.5%. This is the highest figure since the office vacancy rate in the Yeouido area was investigated. 

The Yeouido office vacancy situation had actually been anticipated for several years. These signs became noticeable in the second half of 2011 as large buildings such as IFC and the Federation of Korean Industries were completed one after another. The vacancy rate is already approaching 20%, but there are strong concerns that the vacancy rate will increase further in the future. In particular, small and medium-sized buildings, which are less popular for rental, are taking a direct hit. 

As the office vacancy rate in Yeouido increases, the rate of increase in office rents is gradually decreasing. The nominal rent per 3.3㎡ of the Yeouido office building was 53,570 won as of the fourth quarter of last year. This is a slightly higher figure than the nominal rent of 52,816 won in the first quarter of last year, but the actual rent, taking into account rent-free status where no rent is paid for a while, is actually trending downward. 

These days, new office buildings are increasingly becoming rent-free to attract tenants. It was found that rent-free facilities are provided for an average of 2 to 3 months a year. Considering this phenomenon, the real rent in Yeouido is about 17~25% lower than the nominal rent. Providing one month of rent free per year has the effect of reducing monthly rent by approximately 8%. 

In fact, many building owners in Yeouido are active in providing options such as rent-free rather than directly reducing rent. In a roundabout way, the tenant's demands are being accepted. There is also a calculation that providing options rather than reducing rent can prevent a decline in building value. As office oversupply and vacancy rates increase, contract terms are gradually changing to be more favorable to tenants. Naturally, the concerns of building owners in Yeouido are bound to increase. 

Vacancy surges due to completion of IFC/FKI Center 

Just a few years ago, the Yeouido office market was booming. Compared to downtown Seoul and Gangnam, there were not many empty offices, and thanks to demand from various companies, including major securities firms, the vacancy rate was maintained in the 4~6% range, showing a steady favorable trend. Naturally, rents continued to rise. 

Several factors contributed to the stability of the Yeouido market. First of all, the main demand groups in Yeouido include financial companies, broadcasters and related companies, and various associations and organizations, and it is not easy for most of these companies to relocate to other regions. In the case of financial companies such as securities, insurance, and banks, the Financial Supervisory Service and the Korea Exchange are located in Yeouido, and there are also many financial company headquarters, so it is advantageous to choose Yeouido in terms of information distribution and improving business partnership efficiency. 

Broadcasters such as KBS and MBC and related companies are also supporting solid demand in the Yeouido office market. In particular, small and medium-sized production and advertising companies in addition to major broadcasting companies have formed a pool of small and medium-sized building tenants, and small and medium-sized buildings in Yeouido have shown a stable vacancy trend compared to downtown Seoul and Gangnam. 

This major change occurred in the Yeouido office market with the opening of the IFC Building. This building, built with a project cost of KRW 1.541 trillion, is a project to construct a new complex with a total building area of 504,880 ㎡ on a site of 33,058 ㎡, with 3 office buildings (29th, 32nd, and 55th floors) and a hotel (Conrad Seoul 38). It consists of a shopping mall complex, etc. From the beginning of the project, it has been attracting attention as a major development that will fundamentally change the Yeouido office landscape. 

However, even one year after completion, one out of three office buildings is not lit. The third building, the largest (55th floor), is not being leased. 

In response to this, IFC said, “Strategically, we will start moving into Three (the third building) after the occupancy of Two (the second building) is completed,” but the industry already sees this as evidence that IFC is having a hard time attracting tenants. all. Fortunately, One (the first building) has met most of the office demand, but Two is known to have a rental rate of only about 50%. 

There is a reason why even IFC, a landmark office building in Yeouido, is having difficulty attracting tenants. Compared to the city center or Gangnam, Yeouido's limited tenant pool and relocation demand acted as a negative factor. In other words, this means that various companies and institutions are already located in existing large buildings, so there are not enough factors to create new demand. 

In particular, new large buildings such as IFC have higher rents than existing buildings, so they are bound to have difficulty attracting new tenants. In addition to IFC, the Federation of Korean Industries Hall with 6 floors underground and 50 floors above ground, with a total floor area of 168,681㎡, has already been completed, and with Park One across from MBC in Yeouido soon completed, the Yeouido office market will show chronic oversupply with a sharp increase in vacancy rate. It is highly likely. 

To make matters worse, the recent stock market slump led to the withdrawal of foreign securities companies one after another and the intense restructuring of the securities industry, which also acted as a negative factor for the office market. Another variable is the successive supply of offices in the Sangam district, which is considered an alternative to the Yeouido office market. This year, 310,000 m2, the largest amount for a single area in Seoul, is scheduled to be supplied to the Sangam DMC area. This is the highest figure since 580,000 m2 was supplied in 2007. 

The situation in other office areas in Seoul is also not good. As the supply of large buildings has increased not only in Yeouido but also in the downtown area, vacancy has increased rapidly, so it seems difficult for Yeouido to seize the opportunity for a turnaround for the time being. This is because even downtown, where rental demand was strong, is struggling with rising vacancy rates and falling rents, giving tenants a wider range of office options to choose from. 

An official in the office industry said, “The current situation could last for three to four years at most. “Unless the economy recovers or new corporations are actively created, like the venture craze of the early 2000s, there will be no way to resolve the large-scale supply volume,” he said. 

The outlook for the office market this year is also not bright. According to Mate Plus, an asset management company, office supply in Seoul in 2014 is expected to approach 1.02 million m2. This is a slight decrease from the average annual supply of 1.09 million m2 between 2010 and 2013, when there were concerns about oversupply, but it is similar to the supply in 2012 when the vacancy rate began to rise. It is more than the average annual supply of 990,000 m2 over the past 10 years. 

Buildings take the longest time to supply among various real estate products. Considering various permits and site development, it takes at least 5 years for a building to be built. Accordingly, it is virtually impossible to balance supply and demand in the next few years. 

The oversupply phenomenon in the Yeouido office market is also interpreted to be due to an excessive increase in supply thanks to the relative strength of the local market following the 2008 financial crisis. In particular, for apartments, the government controls supply and demand through land supply, etc., but office buildings tend to be built in droves as local governments grant permits competitively. As a result, the building market is subject to severe fluctuations, with shocks coming all at once. Going forward, the government and local governments must step forward to control long-term supply and demand in the building market. 

[Shin Hee-seong, President of Remax Korea] 

[This article is from Maekyung Economy No. 1744 (dated 02.12-02.18)]


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