Retail components in Seoul's Office Buildings evolve to take on a more independent function

Investors Use Retail Conversions as Value-added Strategy;
Main Drivers Include Weak Office Leasing Demand, Shifts in Consumer Spending​

Seoul, October 4, 2016 – According to CBRE Korea’s latest report, the evolution of retail components in Seoul’s office buildings has reached a point where they are now widely regarded as a crucial element in shaping a property’s overall identity. The special report explains the significance of this trend and identifies the main drivers of this phenomenon in the context of the Seoul office market and the structural changes in consumer behavior.

“In recent years, the retail facilities in Seoul’s office buildings have undergone a significant transformation in terms of their size, content and function,” said Darren Krakowiak, Managing Director of CBRE Korea. “Retail facilities traditionally served as a supplementary component to support the needs of traditional office tenants, however, the increase in space allocated to retail components in newer office buildings have resulted in these supporting elements taking on a more prominent role in shaping the building’s overall identity.”

Retail components in new Grade A office buildings are now occupying multiple floors, expanding their presence beyond the basement and ground floors. The volume growth of rented retail space in Grade A buildings in Seoul has primarily been due to landlords converting more floors to accommodate retail facilities.
“Among domestic and international investors, office to retail conversion is now a widely accepted value added strategy; they can achieve higher rents, reduce vacancy, boost office leasing demand, attract new tenants, improve the visibility of their buildings and gain a competitive advantage over competitors,” said Mr Krakowiak.

Adding value to an office building via retail conversion can raise the worth of the asset. However, landlords are advised to implement tailored strategies for their asset after carefully considering five key factors such as location, CAPEX, regulatory compliance, retail tenant mix, and building management.

Factors Driving the Retail Evolution
There are two main drivers behind the growth of retail components in Seoul’s office buildings: weak office leasing demand and shifts in consumer spending.

Weak economic growth has dampened leasing demand in the three major business districts—Central Business District, Gangnam Business District and Yeouido Business District—forcing landlords to offer a variety of incentives to retain existing tenants and attract new ones. This has resulted in the decline of net effective rents for Grade A offices in Seoul with stagnant effective rents translating to weaker Net Operating Income (NOI). NOI provides landlords and potential investors with an important indicator in determining the value of the property and is a major catalyst behind the current trend for retail conversions.

Another factor driving the retail conversion trend is the changing dynamics of the Korean retail market due to the rapid growth of single-person households. Single-person households consisting of young and unmarried professionals with considerable disposable income are now the epicenter of the Korea retail market. Many of these individuals are displaying a stronger desire for a wider range of retail options in close proximity to their workplace, a trend which has driven the growth of the food and beverage sector.

The coming years will see further evolution in the form of adding cultural elements such as pop-up exhibitions and displays to attract more visitors, along with the more effective utilization of frequently ignored areas such as rooftops and terraces.

DISCLAIMER:

Neither CBRE nor its affiliated companies make any warranties or claims on the implied accuracy of the information contained herein.
 

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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2015 revenue). The company has more than 70,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.​​

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