Active Investment and M&A in the ICT Ecosystem... Office Supply Cannot Keep Up

Myeongdong and Dongdaemun Called Ghost Towns... Pangyo Sees Office Boom
Big Tech Sweeps Up Listings... Steady Demand for Startup M&A and More

A panoramic view of the office area around Pangyo New Town in Seongnam, Gyeonggi Province. The Alpha Dome City 6-1 block building (left), with a total floor area of 49,000 pyeong, is scheduled for Kakao to move in during the second quarter of next year and use the entire space.

COVID-19 dealt a direct blow to the commercial real estate market. Shopping districts bustling with crowds, such as Myeongdong and Dongdaemun in Seoul, turned into ghost towns. However, the office market tells a completely different story. Contrary to expectations that the office market would slump due to the spread of remote and telecommuting work, it is even difficult to find available office spaces in Pangyo, where ICT companies are concentrated. The supply of office space cannot keep up with the rapid growth of ICT companies. The rapid expansion of big tech companies’ businesses and organizations, along with mergers and acquisitions (M&A), has created a situation where supply shortages are a concern.

◇No vacant buildings due to demand from Naver and Kakao= ‘Alpha Dome City’ in Pangyo New Town, scheduled for completion this October, is a representative example illustrating the Pangyo office market situation. Alpha Dome City is a mega complex development project with a total investment of about 5 trillion won. Upon completion, its total floor area will be 400,000 pyeong, making it the largest in Korea. It is more than 1.4 times the size of the Global Business Center (GBC) in Samseong-dong, Gangnam-gu, Seoul.

Despite being a mammoth commercial and office space, there is no vacant space at all. The representative tenants are Naver and Kakao, which have established themselves as the two major big tech companies.

Naver is a co-owner of the building on Alpha Dome City Block 6-2. In 2018, Naver invested 196.3 billion won (45.1% stake) in the private equity fund ‘Mirae Asset MAPS Specialized Private Real Estate Investment Trust No. 62’ set up by Mirae Asset Asset Management, which constructed this building. The space will be used as office space for the increased number of employees due to business expansion. Kakao also plans to consolidate its scattered affiliates and move into Alpha Dome City Block 6-1. Korea’s top IT companies will become neighbors side by side. Kakao signed a lease contract to rent the entire building for 10 years. Starting from May 2022, Kakao plans to move all its major affiliates, including the Kakao Pangyo office, into the building.

The reason big tech companies are eager for large-scale office spaces is primarily due to a shortage of office space. Naver’s number of employees (including subsidiaries) nearly doubled from 8,100 in 2017 to 15,148 in 2018 and has remained at a similar level since. It is difficult to secure office space at the headquarters in Jeongja-dong, Bundang New Town, so many subsidiary employees work offsite. Kakao is in a similar situation. As of last year, Kakao had 8,602 employees, a 47% increase from 5,832 two years ago. According to the Fair Trade Commission as of August, Kakao has a total of 128 affiliates, second only to SK Group’s 156. There is a limit to accommodating all employees in the ‘Kakao Pangyo Office,’ which serves as the headquarters.

At the end of last year, an 800 billion won prime site in Pangyo was purchased by an NCSoft consortium. NCSoft acquired the last large supply site remaining in the Pangyo area, the temporary parking lot of Seongnam City Hall, for 837.7 billion won and plans to use it as its headquarters.

◇Office market boom as major players flock= In Pangyo, even small office spaces are hard to find as demand from one- to two-person companies surges. Mr. A (39), who plans to start a medical device-related startup, said, "There are quite a few biotech companies in Pangyo, so I wanted to start my business here, but the rent is steep, so I am looking for spaces around Magok-dong, Gangseo-gu." The KT Economic Management Research Institute predicted that the domestic SOHO office market, which was only about 60 billion won in 2017 due to the growth of one-person companies, would grow to 770 billion won by 2022.

Active startup investments and M&A by ICT companies are also acting as a boon to the office market. Large law firms that had concentrated in Gwanghwamun have recently relocated and expanded offices in Pangyo. Law firm Sejong completed a major overhaul by reinforcing its lawyer staff and relocating its Pangyo branch office, the ‘Innovation Center,’ three years after its establishment in June. As big tech companies’ investments and M&A activities in startups become more active, related legal service demand is also increasing. For the same reason, law firm Kwangjang plans to open an office in Pangyo within this year. Taepyungyang, the first major domestic law firm to enter Pangyo, is also reportedly considering expanding or relocating its office.

With the continuous demand from ICT companies, the office market centered around Pangyo is expected to remain prosperous for the time being. Despite a recent interest rate hike by the Bank of Korea last month, the base rate and borrowing interest rates remain low, keeping liquidity in the market very abundant. Quarterly investment returns during the spread of COVID-19 last year hovered in the low 1% range (1.32%?1.64%), but in the first quarter of this year, returns recovered to the 2% range (2.04%). Currently, the return rate stands at 2.15% (as of the second quarter), surpassing the pre-pandemic level of 2.10%.

Song Seung-hyun, CEO of City and Economy, explained, "Industries like ICT are experiencing a boom due to COVID-19, which is further increasing (office) demand." He added, "It is true that prices of some commercial real estate have dropped due to COVID-19, and many see this as an opportunity to buy at a low price."