Economic Slowdown... "6 out of 10 Companies Considering Office 'Downsizing' Relocation"

AlSquare Recent Survey
63.6% of Respondent Companies Consider 'Reduction'
Office Real Rent Increased by 10% Annually Over Past 2 Years
This Year Expected to Slow to 7-8%

[Asia Economy Reporter Kim Min-young] The mood in the Seoul office lease market is expected to cool down this year. Although the pace of US interest rate hikes has slowed, the business and investment environment for companies is not as favorable as in previous years. There is also analysis that companies will leave Seoul's prime areas to reduce operating costs.

Commercial real estate data specialist RSquare announced the 'Commercial Real Estate Outlook 2023' containing these details on the 15th. According to RSquare, as of the fourth quarter of last year, the average vacancy rate for Seoul offices was 1.9%. Considering that the natural vacancy rate due to tenant relocation is typically 5%, it is very difficult to find vacant office space in Seoul.

RSquare's analysis shows that the annual rent-free (free lease) period for Seoul offices was only 0.91 months as of the third quarter of last year. This means that the rent-free benefit is provided for 0.91 months out of the year. In 2017, this figure exceeded 2.5 months. This is interpreted as the lease market being 'more prosperous than in previous years.' This is because the number of companies relocating from other areas of Seoul to prime areas has increased.

Research Center Director Ryu Kang-min analyzed, "The proportion of new demand and area expansion in the overall office demand variation was only 10%. However, the demand for relocation from other areas of Seoul to prime areas was quite significant." From 2021 to 2022, the proportion of office demand changes in Seoul involving relocation from other areas to the CBD (Central Business District) and YBD (Yeouido Business District) was 43% and 54%, respectively.

However, this year, a change in this trend is being detected. Although vacancy rates are expected to remain low, due to the economic slowdown, some tenants are likely to leave prime areas to reduce operating costs, similar to the global financial crisis period. Real rents, which had recorded annual increases of over 10% in the past two years, are expected to rise by only 7-8%.

In fact, in a survey conducted by RSquare from February 3 to 10 targeting 122 companies about their 'office relocation intentions,' 6 out of 10 companies (63.6%) planning to relocate this year said they would 'reduce their office size.' Among them, 64.3% responded that the reason for reducing office size was 'to cut costs due to the economic slowdown.'

When asked about difficulties in relocating offices, 63.9% of respondents (multiple answers allowed) cited 'sharp rent increases,' and 37.7% said there was a shortage of offices meeting their desired size or interior conditions. The most important factors when searching for an office were 'ease of public transportation' (60.7%) and 'rent and maintenance fees' (55.7%).

The outlook for the office sales market is also not favorable. The investment environment has worsened compared to previous years as analyses suggest that the base interest rate will be raised once or twice more. Director Ryu Kang-min said, "Office prices are expected to adjust in 2023, with a decline of about 10% from the peak. However, in 2024, due to interest rate cuts and supply shortages, there is a possibility of rental market price increases and transaction volume growth."