What to expect in Seoul’s Grade A office market this year 

There is no new Grade A office supply scheduled for completion in the coming year. 

There were about 260,000 pyeong of new Grade A office supply in Seoul from 2020 to 2021. Given the large supply, the market recorded the highest net absorption ever in 2021. 

According to JLL, only about 15,000 pyeong of office supply is scheduled in 2022, and the vacancy rate is currently maintaining a stable single-digit state, hence, the net absorption is also expected to be less than that of 2021. This is not due to a decrease in lease demand but rather a natural phenomenon that occurs when the space available for lease is reduced. As there is not much scheduled supply in the future, it is expected to be filled sequentially mainly by existing buildings, and the vacancy rate, which recorded 8.0% this quarter, is also expected to decrease. 

Here’s more from JLL:

CBD has no Grade A office supply scheduled for the next 12 months, and demand is expected to remain similar to the current level. As the demand for relocation of conglomerates and foreign companies is expected to continue, and since there is no leasable space for relocation to Gangnam, we can also expect the overflow demand from Gangnam and Pangyo to flow into the CBD. However, the CBD demand may be polarised depending on location, transportation convenience and building condition.

In Gangnam, due to the current extremely low vacancy rate, leasable space is limited and future supply is tight, thus, new leasing activities are expected to be significantly limited. 

The vacancy rate in Yeouido is falling at a very steep rate, and vacancy of the FKI Building and IFC is almost resolved.

Currently, the vacancy rate of all Grade A buildings, except Parc.1, is recording a single digit, and leasing activities are expected to be carried out mainly at Parc.1 as there is no scheduled supply in 2022. Demand for Parc.1 is expected to remain solid as there are not many large area offices available in any of the three major districts. 

Rents for Seoul Grade A office, which hit an all-time high, are expected to continue to rise in the future. As vacancy rate is expected to continue to stabilise, a rise in rent and a further decline in rent-free periods are also expected. Rents may be polarised depending on the quality and location of the building. As the vacancy rate in Yeouido is higher than in other districts, rent-free and gross rent may change significantly depending on the stabilisation trend of vacancies. 

Korea's interest rate equally rose 25 bps in August, November and January, respectively, to the current 1.25% level. As the borrowing cost rises, the office cap rate, which is currently very compressed, is expected to rise. On the back of abundant liquidity, the transaction price per-pyeong continues to set new records, but it is expected to slow down in the future. In addition, the number of office transactions is scarce at the moment, and the volume of transactions is expected to decrease despite healthy investor sentiment as asset managers want to maintain the AUM level.