[The Logistics Investment Rebound]② Unprecedented Supply Aftereffects... Vacancy Rates Rise and Defaults Increase

Last Year, the Largest Ever Supply of Logistics Centers in the Seoul Metropolitan Area
Concerns Over Bridge Loan Defaults as Construction Delays Despite Land Acquisition

Since last year, the supply volume of logistics centers has rapidly increased, leading to a rising vacancy rate. This year, the oversupply phenomenon is expected to intensify, and the vacancy rate is also anticipated to increase rapidly. As a result, losses for investors who have made large-scale investments in logistics centers are inevitable, and concerns about loan defaults are growing among financial companies that provided project financing (PF) loans for development projects.

Continued Oversupply Amid Record Logistics Center Construction

According to Cushman & Wakefield, a specialized alternative investment analysis firm, last year saw the largest-ever supply of logistics centers across various areas in the metropolitan area. Forty new Grade A logistics centers were supplied, totaling 3.05 million square meters in gross floor area. This amount corresponds to one-quarter of the cumulative supply volume up to 2021. The total gross floor area of logistics centers newly supplied in the second half of last year reached 1.75 million square meters. In particular, supply was mainly concentrated in the western region of Gyeonggi Province, including Incheon (743,000 square meters), and the eastern region centered around Icheon (626,000 square meters).

In the western region, five logistics centers were completed solely within the Incheon North Port hinterland complex. A representative logistics center is the Cheongna Logistics Center, with a gross floor area of 431,253 square meters. It was the largest logistics center newly supplied in the second half of last year. This year, 12 logistics centers will be completed in the North Port hinterland complex. The supply volume in Incheon is increasing significantly, including the Seoknam-dong Innovation Logistics Center in Seo-gu, Incheon, Geomdan Logistics Park, Seoknam-dong SNK Complex Logistics Center, LogisHub, and Wonchang-dong Complex Logistics Center.

In the eastern region, all 11 logistics centers completed in the second half of last year were large-scale centers with a gross floor area exceeding 33,000 square meters. The largest among them is the Yongin Namsa Center. It is known that CJ Logistics is developing it as a smart fulfillment space by applying advanced equipment and systems such as robots. Supply volumes are also rapidly increasing in the eastern region, including Icheon, Ansan, Yeoju, and Gwangju.

Sharp Rise in Vacancy Rates Due to Oversupply

As the supply volume of logistics centers in the Gyeonggi area accumulates, vacancies are also increasing. According to global alternative investment firm CBRE, the vacancy rate for Grade A logistics centers in the metropolitan area reached 10% last year, a 9 percentage point increase compared to the previous year. Regionally, the vacancy rate is rising sharply in Incheon, Osan, and Ansan, where supply volumes have surged. The vacancy rates in these three areas already exceeded 20% last year.

With the increase in new logistics center supply this year, the dominant analysis is that vacancy rates will continue to rise rapidly for some time. An investment banking (IB) industry official said, "When adding the supply volume originally scheduled for completion this year and the delayed completions, record-level supply is expected again this year," adding, "Some forecasts even predict that the vacancy rate for Grade A logistics centers in the metropolitan area could increase by more than 20 percentage points." The official also noted, "The vacancy problem is particularly severe for high-priced cold storage logistics centers," while "ambient temperature logistics centers are relatively stable."

Friction Between Investment Institutions and PF Lenders

As oversupply continues and vacancies rapidly increase, concerns have grown among investment institutions that invested in logistics centers and financial companies that provided PF loans. If they fulfill the pre-purchase agreements as is, losses are inevitable; if they do not, loan defaults among PF lenders become unavoidable.

Because of this, friction between investment institutions with purchase agreements and financial companies that provided PF loans is increasing. Financial companies that provided PF loans based on the agreements insist that the agreements must be fulfilled as per contract, while investment institutions are delaying fulfillment by citing various reasons. A financial company official stated, "Without pre-purchase agreements from reputable investment institutions, PF loans would not have been executed at all," and evaluated, "If the agreements are not fulfilled, it would be no different from the Legoland incident in Gangwon Province, where payment guarantees were not honored."

Concerns about bridge loan defaults, which were lent to secure logistics center sites, are also emerging. This is because as the profitability of logistics center projects declines, cases where land is secured but construction does not proceed are increasing. An IB industry official expressed concern, saying, "With rising construction costs and PF loan interest rates, logistics center development costs have also increased significantly," adding, "If development projects are continuously delayed due to the decline in logistics center values, bridge loan defaults will also increase."