13% of country’s office space is devoid of tenants

A growing number of offices are lying empty in major business districts across Korea, but rents are not falling despite the high vacancy rate.

According to the Korea Appraisal Board, the vacancy rate for offices nationwide during the first half of this year stood at 13.1 percent, the highest seen since 2008, the year of the financial crisis. In 2008, the vacancy rate was 5.4 percent.

However, during the first half of this year, average rents for office space nationwide was 14,800 won per square meter ($1.15 per square foot). This is down only slightly from 15,000 won recorded in 2008.

Vacancies are more pronounced in large buildings with high rents, but it is not much different in smaller buildings. The situation is worse in regional cities because the supply of office space outstrips the demand that is slowing due to a bad economy.

Seoul’s vacancy rate is 11.1 percent, slightly lower than the nationwide average, but triple the 3.8 percent recorded in 2008.

Big buildings with higher rents are particularly devoid of renters. The vacancy rate for small and medium-sized office buildings is 10 percent, but bigger buildings have a 13.1 percent rate.

The average vacancy rate in areas near Seoul is 12.3 percent, while the number is 10.8 percent in Gangnam District and 9.2 percent in Yeouido and Mapo District.

The vacancy rate in regional cities is even higher. Busan and Daegu’s average vacancy rate is 15 to 16 percent, while those of Incheon and Gwangju are around 18 percent. Daejeon’s rate is over 21 percent.

Insiders say there are many buildings with higher vacancy rates because some owners lower the official vacancy rate to attract higher rents.

“It may seem like there are few empty offices, but in fact, there are a lot of buildings in Gangnam with a vacancy rate of 20 percent or higher,” said Chung Yong-deok, who manages one of the most popular office buildings in Yeoksam-dong, southern Seoul.

But despite the high vacancy rate, rents are not falling that much.

While prices have dropped only slightly nationwide, average rents have actually risen in Seoul from 18,600 won in 2008 to 20,500 won in the first half of this year. Despite the rising vacancy rate, property management firms are still raising rents.

More buildings are offering office space under “rent-free” agreements, which waive rents for a few months in exchange for holding rents at certain levels.

But as the rental market has deteriorated, some office owners have kept rents steady since the peak in 2012, and owners of small and medium-sized buildings have lowered rents rather than leave premises empty.

“Even if a desirable level of rent is maintained, investment returns deteriorate rapidly once the vacancy rate rises above 10 percent,” an industry insider said.

Experts say individual building owners aim for around 5 percent return on investments, and corporates, such as real estate funds, aim for returns of around 6 to 7 percent. Such returns are achievable even with a 5 percent vacancy rate.

The rising number of new buildings are seen as a key factor behind the rising vacancy rate. According to ShinYoung Asset, a real estate service firm, around 9 million square meters (2,000 acres) of new office spaces came on the market in the Seoul and Bundang areas from 2010 to 2014.

This means there was an output of an average 1.8 million square meters of new office spaces per year. This is double the average annual office space supply of 830,000 square meters during the period from 2001 to 2009.

Today, despite the oversupply, a lot of large development projects are underway across the nation. They include Sangam DMC, the second techno valley in Pangyo and the high-tech business district in Gangdong District.

“In the past five years, city development projects propelled the output of new office buildings,” said Choi Jae-gyeon, head of research at ShinYoung Asset.

BY CHOI YOUNG-JIN [park.jungyoun@joongang.co.kr]