Seoul industrial vacancy rate hits 5-year high of 12.6% in Q1

This is the highest vacancy rate since 2018.

During the first quarter of 2023, 19 new industrial centres were completed in Seoul. According to JLL, new supply occurred in four submarkets excluding the North, with one in the Central, four in the South, eleven in the South-east, and three in the West. 

A number of centres whose completion was delayed the previous quarter came on-stream in 1Q23.

Here’s more from JLL:

The vacancy rate in SCA was 12.6%, the highest level since 2018. As there is an abundance of recent completions, the vacancy rate rose due to unresolved vacancies in these centres. Vacancy rates increased in the South, the South-east and the Central, while those in the West decreased slightly. The North continued to maintain a 0% vacancy rate.

Strong leasing activity in the quarter

Net absorption in 1Q23 reached a record-high of about 281,500 pyeong. This is equivalent to around 59% of the annual net absorption in 2022. Leasing activity in new completions accounted for roughly 78% of the quarterly net take-up.

The types of tenant pools have diversified, with consumer electronics, fashion, e-groceries, cosmetics and 3PL tenants signing leases. While there are centres that have improved occupancy in the quarter, some others have witnessed departures of existing tenants from 3PL and e-commerce categories.

Investment activity slows down substantially

In 1Q23, overall net effective rent for SCA reached KRW 30,287 per pyeong per month, a decrease of -1.7% q-o-q as the proportion of stock in the South-east increased. Rents in the South-east were lower compared to other submarkets. Rents rose in all districts except the West. Rent in the West tumbled -4.7% q-o-q, which was attributable to larger incentives to reduce vacancies.

The investment volume in 1Q23 recorded KRW 789 billion, up 9.2% q-o-q and down -59.0% y-o-y, clearly revealing the tight investment market. A notable deal for the quarter was Alpha Flux Logistics Center, which traded for about KRW 115 billion from developer Focus On, to Starload Asset Management.

Outlook: The supply pipeline may shrink further in 2023

Logistics centres which had delayed completions in 2022 are scheduled to complete in 2023. However, as financing costs remain high and lingering leasing risk take a toll on developers, delays in construction are expected to prolong for the time being. Among the districts, the West is anticipated to see the largest new supply volume, which would result in a surge in vacancy.

There are rising expectations of the Bank of Korea to hold rates, which could be hinting at gradual stabilisation of mortgage rates. However, investment appetite should stay healthy on a selective basis. Nonetheless, liquidity shortages and the still-high cost of debt are likely to hamper deal closings. 

Note: Seoul Industrial refers to Seoul Capital Area's prime logistics market.