CBRE Korea: ‘Rebound in Transaction Activities in Domestic Commercial Real Estate Market Expected to Support Market Recovery’

- Seoul commercial real estate investment volume up 72% q-o-q in 2023 Q2
- Demand for office investment leads recovery in investment volume

August 1, 2023 (Seoul, Korea) – According to Seoul Figures Q2 2023 released by CBRE Korea, a global commercial real estate services company, 2023 Q2 domestic commercial real estate investment volume rose to KRW 3.8 trillion in Q2 2023, representing growth of 72% q-o-q. The period witnessed a significant recovery in office investment transactions at KRW 2.4 trillion, which more than doubled q-o-q. This pushed up H1 2023 investment volume to KRW 6.1 trillion.

Rent-free periods continued to decrease across major business districts, driving the growth of average rents. Average Grade A effective rents in Seoul rose 4.0% q-o-q. Solid demand will ensure vacancy remains low and rents continue to rise, with new supply set to be limited to a large office in Yeouido Business District (YBD) this year and several new buildings in the Central Business District (CBD) in 2024.

In retail, as the retail market shifts back to face-to-face consumption, growth in online sales is slowing. However, sales at high streets and department stores increased, and domestic retail sales grew by 4.6% y-o-y in Q1 2023 due to the gradual recovery of domestic consumption and easing of inflation.

Meanwhile, 16 new Grade A logistics facilities were completed in Q2 2023, and most pipeline projects that are already underway are reporting swift construction progress, with some properties originally due to come on stream next year having had their completion dates brought forward. This is expected to increase total new supply for this year to a record-breaking level. Average vacancy marked a 7%p increase from the previous six-month period resulting from the short-term impact of large-scale supply.

“As the Bank of Korea has frozen base rates four consecutive times at 3.5%, interest rates have begun to ease since the end of the last year, and the investment market is gradually rebounding,” explained Claire Choi, a Head of Research in CBRE Korea. “In particular, with competition for Grade A space intensifying, domestic companies are considering buying as well as leasing, while around 20% of investment volume was attributed to foreign capital, with overseas investors’ especially active in the logistics sector.''

Below are the Q2 2023 commercial real estate market figures by sector:

Office
While office pre-leasing has been near non-existent in recent years, activity is now picking up with new Grade A offices due to come on stream in the YBD this year and in 2024, and rents in Seoul jumped as the rent-free periods continued to decrease across major business districts. Solid demand will ensure vacancy remains modest and rents continue to rise.

Retail
As the retail market shifts back to face-to-face consumption, growth in online sales is slowing. Cumulative growth in online sales as of May was 2.4% y-o-y, down 0.4%p from the end of 2022. The gradual recovery of both domestic consumption and the number of foreign visitors to Korea ensured sales at specialized stores, which represent high streets, increased by 5.2%, and growth in department store sales remained solid at 7.9%.

Logistics
Sixteen new Grade A logistics facilities were completed in Q2 2023. E-commerce and third-party logistics providers (3PLs) were the main drivers of leasing demand, and average vacancy stood at 17.0% as of the end of H1 2023, marking a 7%p rise h-o-h.

Investment
Seoul commercial real estate investment volume rose to KRW 3.8 trillion in Q2 2023, representing growth of 72% q-o-q, and strong leasing fundamentals contributed to recovery of volume, providing support to capital values. Since the end of the last year, as interest rates have begun to ease, the investment market has been gradually recovering.