Q2 Commercial Real Estate Market Shows Recovery Amid Expectations of Interest Rate Cuts

Office Vacancy Rates Rise in Seoul Due to Increased Supply in Other Districts
Logistics Center Transactions Up 70% Year-on-Year
Hotel Performance Improves on the Back of Rising Inbound Tourism

Koramco Asset Management's Research & Strategy Division (R&S) published its Q2 commercial real estate market outlook report, "Resilience Amid Shifting Fundamentals," on May 29.

The report forecasts that the commercial real estate market in the second quarter is showing a gradual recovery trend, driven by expectations of interest rate cuts and the reallocation of investment assets. However, it expects the strength of the recovery to differ significantly depending on changes in the fundamentals of each asset type.

In the office market, a large-scale pre-purchase transaction for an office building in Magok worth approximately KRW 2.9 trillion took place in the first quarter, bringing total transaction volume to KRW 6 trillion. This represents an increase of about 122% compared to the same period last year. The expansion of large-scale supply has led to a rise in overall office vacancy rates, with the vacancy rate in Seoul’s business districts increasing by 2.3 percentage points from the previous quarter to 7.2%. The actual rental growth rate was 0%, indicating a clear slowdown in rental price increases. Small and medium-sized offices are also maintaining high vacancy rates.

Due to delays in the commencement of many office development projects, the report predicts that new supply will remain limited through 2027. As a result, it expects continued growth in emerging business districts such as Pangyo, Magok, and Seongsu.

The logistics center market recorded a transaction volume of KRW 1.4 trillion, a 70% increase compared to the same period last year, signaling a full-fledged recovery. Transactions have resumed, mainly for newly built large-scale assets over 99,000 square meters in the Seoul metropolitan area, with 8 out of 9 transactions involving mixed-use and ambient assets. New logistics center supply in the first quarter was only about 132,000 square meters, down 84% from the same period last year. The report also notes that new permits have turned downward, leading to a sharp decline in supply.

The outlook for the hotel market is positive. The report expects continued improvement in stable operating performance centered in Seoul, driven by an increase in inbound tourists from China, Japan, Taiwan, the United States, and other regions. The entry of global luxury brands such as Mercure Hotel, Ambassador Pullman, and Rosewood into the domestic market is also anticipated. Expectations for higher quality hotel assets are rising. In addition, attempts to maximize profitability by remodeling existing retail facilities or office buildings into hotels further underscore the positive sentiment toward the hotel market.

The data center market is expected to see mid- to long-term growth due to the expansion of the AI industry and the entry of global cloud service providers into Korea. In particular, asset management firms and global data center operators are competitively pursuing data center development. However, the persistent shortage of available development sites and difficulties in securing power in core areas are expected to further highlight the scarcity of assets in the Seoul metropolitan area. According to the report, approximately 23 new data centers will be supplied in the Seoul southwest region, Incheon, Goyang, Yongin, and other parts of the metropolitan area by 2027.

For rental housing products, the combination of an interest rate cut trend and government lending regulations is leading to increased demand for monthly rentals and a growing preference for monthly rent among landlords, making this sector an emerging investment destination. The report notes that recent investments by foreign investors in domestic rental housing products reflect these market conditions. The acceleration of the shift from jeonse (lump-sum deposit leases) to monthly rentals is driving up rents, strengthening the foundation for stable returns. In addition, the report analyzes that regulations on lifestyle accommodation facilities and the activation of residential REITs are having a positive impact on the rental housing product market.

Kim Yulmae, Head of the R&S Division at Koramco Asset Management, stated, "In the second quarter, the commercial real estate market is at a point where strategies must be adjusted according to changes in mid- to long-term profitability and investment conditions, rather than short-term demand. Understanding structural changes and taking a selective approach to key sectors such as offices, logistics, hotels, and data centers is crucial."

Koramco recently announced its "Vision 2030," emphasizing an investor-centered management philosophy and pursuing comprehensive management changes such as organizational restructuring to enhance expertise and efficiency. The company plans to continue providing practical insights through quarterly market reports that analyze changes and outlooks by asset class, enabling investors to make more informed decisions.