Seoul's office vacancy rate up from 6.8% to 9.5% in Q2

Vacancy rates soared as two new office buildings in the CBD were completed.

JLL reveals Seoul’s overall Grade A net absorption remained positive, recording 6,400 pyung in the quarter, but weakened on q-o-q and y-o-y bases. Despite the economic downturn amid COVID-19 concerns, the net absorption of all three districts continued to maintain in positive territory, aided by robust leasing demand.

The largest contract in CBD was SK M&Service’s signing of about 2,000 pyung with City Centre. Multiple tenants from the finance and insurance sector signed contracts with IFC and FKI in Yeouido. In Gangnam, one of the notable deals included Spoon Radio sealing a deal with T412 (about 900 py).

Here's more from JLL:

The CBD welcomes two new Grade A office buildings

During the quarter, two new Grade A office buildings located in the CBD finally came onstream – the SG Tower (office GFA 30,200 pyung) and Centrepoint Donuimun (office GFA 22,800 pyung).

The overall vacancy rate soared from 6.8% to 9.5% on a quarterly basis, largely driven by new supply in CBD. Apart from the hike in CBD vacancy, Yeouido observed a moderate decline in vacancy, recording 6.7% on the back of strong leasing activity. Gangnam continued to boast the lowest vacancy among the three submarkets, further dragging down its vacancy rate from 3.7% to 3.5% q-o-q.

The Seoul office market demonstrates decent investment activities

Seoul’s overall effective rents continued to observe an uptick, which implies stable occupier demand. By district, several major buildings in the CBD slashed the rent-free period as they were able to maintain robust occupancy levels. The rental growth in Yeouido stayed unchanged, while that of Gangnam moderately rose by 0.3% q-o-q.

Despite COVID-19 concerns, the overall capital value of Seoul slightly increased by 0.9% q-o-q with healthy market conditions. The negative impact of COVID-19 was minimal in Grade A office buildings as they mostly comprise stable anchor tenants.

Outlook: Influx of anticipated new supply could lift overall vacancy

Upcoming new large-scale projects in the pipeline could lead to a temporary spike in vacancy. There could be pending leasing activities, with economic uncertainties acting as a headwind. However, leasing demand in Grade A office buildings in Seoul tends to be resilient to market conditions, and thus, less hurt by the global economic downturn amid the COVID-19 crisis.

Overall sales transaction volume may contract y-o-y, as decision-making process slows down and high-quality assets become scarce. Heated competition among core assets with stable income is expected. Gangnam is likely to be the most appealing district. Favourable borrowing rates, coupled with a booming REIT market, are set to open up investment opportunities despite COVID-19-related challenges.