The commercial real estate downturn that began in 2023 continues. The residential market in the metropolitan area has shown signs of recovery in 2024, but the transaction volume in the commercial real estate sector, including offices, logistics centers, retail, and investment, remains at a similar level to that of 2023. This is because most properties, excluding prime assets, failed to find buyers. The difference in price expectations between sellers and buyers has been cited as a major cause. Consequently, there are increasing cases of canceled or postponed sales of large offices in key commercial areas such as Gangnam (GBD) and the Central Business District (CBD).
However, there is growing optimism that the commercial real estate investment market will show a significant recovery in 2025, aided by the trend of interest rate cuts and the recovery of rental prices in downtown areas. Experts believe that transactions, particularly in sectors such as data centers (IDC), urban logistics centers, rental housing, and hotels, will become active. Additionally, as commercial real estate prices adjust, analysis suggests that sales will occur for restructuring items from domestic corporations with high real estate exposure and for inventory that was postponed for transactions in 2024.
Lee Tae-ho, the CEO who began leading Jones Lang LaSalle (JLL) Korea from June 2024, noted, "Overall, the trend of interest rate cuts continues, and the rapidly rising commercial real estate prices are being adjusted to a reasonable level. Additionally, since investors are showing a need for sectors beyond offices and retail, there is no reason for the commercial real estate market in 2025 to be negative."
Lee is regarded as a leading expert in the commercial real estate investment industry. He served as the Korean representative for CBRE Global Investors for nine years. Previously, he was the regional managing director in the Capital Markets division of JLL Korea. He has also worked at major domestic and global real estate corporations such as HMC Investment Securities (currently Hyundai Motor Securities) and ING Real Estate Investment Management.
Recently, CHOSUNBIZ met with Lee to discuss the current state of the domestic commercial real estate investment market in 2024 and the outlook for 2025.
─ The domestic commercial real estate market showed signs of stagnation due to recession and high-interest rates until 2024.
"Domestically, the office and logistics center represent the largest markets among traditional commercial real estate. In 2023, the transaction values for offices and logistics centers were 11.4 trillion won and 6.4 trillion won, respectively. The transaction status for the fourth quarter of 2024 is still being compiled, but based on data until the third quarter, offices are estimated to be around 10.1 trillion won, and logistics centers around 4 trillion won. However, including properties like the Dongnimun D Tower (9 trillion won) and Yeouido NH Nonghyup Capital (1.4 trillion won) in the fourth quarter, it seems that office transactions will likely exceed the 2023 figures, while logistics centers may fall slightly short. Overall, it can be seen as a roughly similar level."
─ There seem to have been macroeconomic changes that could positively affect the real estate investment market, such as interest rate cuts.
"In fact, as interest rates rose in 2023, some institutions developed strategies to enter distressed transactions, commonly known as loss of profitability (EOD), in 2024; however, there have been no significant transactions involving distressed assets. Prices for office buildings and logistics centers have varied by location, with some decreasing while others still holding steady. Therefore, it seems that deal closings have progressed more slowly than expected. I believe if investors can utilize the changed financial environment in 2025, activity may increase."
─ It seems that interest in domestic commercial real estate among global investors is increasing.
"During the COVID-19 pandemic, foreign investors effectively paused their entry into the domestic market. However, there is a growing need for South Korea recently. Among the Asia-Pacific region, there is substantial interest in Japan, Australia, Singapore, and South Korea. This is because it is economically stable, has high transparency, and possesses a well-established investment environment. Recently, as political and economic uncertainties have increased in China, investment trends have declined; as a counterbalance, Japan and South Korea are gaining interest from foreign investors."
─ Recently, political uncertainties in the country have increased. Will it affect the entries and investments of foreign investors?
"Economic agents are most wary of uncertainty. Commercial real estate has lower liquidity compared to stocks or bonds, making it difficult to observe rapid changes in a short period. However, if the current uncertainties related to martial law and impeachment persist in the long term, capital outflows from the domestic market and a contraction of business activities by major tenants could negatively impact the market. In particular, it is highly likely that the recovery process from the ongoing turmoil remains unclear, which might delay decision-making among market participants. However, compared to before, the predictability of the economy is increasing, and there seems to be an improvement in the overall perception of the current economic situation among political circles, which could lead to positive market changes."
─ What sectors are foreign investors interested in?
"Domestic investors mostly focus on what is commonly referred to as core assets—stabilized assets capable of generating stable cash flow. In contrast, foreign investors have pursued higher-yielding value-add strategies. However, there has been a recent tendency for the required yields to decrease slightly, and the targeted assets are diversifying from offices and logistics centers to data centers, hotels, and rental housing."
─ Recently, there have been frequent instances of global institutions entering the domestic residential market.
"There is a particularly strong demand for the residential rental market. The increase in investors' interest is a result of the rising number of single-person households, demographic changes due to aging, and government policies promoting the expansion of rental housing supply. There are numerous requests coming in for living centers such as multi-family, student housing, and senior housing. It seems that foreign investors are also feeling the necessity to diversify their portfolios beyond existing properties like offices or retail. This can be seen as an extension of the global investment trend that seeks both stability and growth potential."
─ What are the promising locations for commercial real estate in the country going forward?
"The Central Business District (CBD), Gangnam (GBD), Yeouido (YBD), and the Pangyo area are core locations that consistently attract high interest in South Korea's commercial real estate market. With stable rental demand, long-term value appreciation, excellent infrastructure, and talent pools, these areas are likely to continue receiving attention in the future. The Magok district currently faces some difficulties due to an economic downturn, leading to tenant demand for cost savings. Although it may experience temporary challenges due to oversupply in the short term, there is a high possibility that it will develop into new business districts similar to Yeouido, Sangam-dong, and Pangyo in the long term. However, until stable rental rates are achieved, rental increases are expected to be limited."
─ What are the prospects for the commercial real estate investment market in 2025?
"Offices continue to be the preferred sector for domestic investors. In contrast, foreign investors are showing a strong interest in logistics centers, data centers, and hotel sectors. In particular, data centers are gaining attention as they are expected to be relatively less affected by the real economy while being assets that combine stability and growth potential. While hotels have previously drawn focus primarily on luxury hotels, investment demand for midscale hotels is expected to increase in the future. There is also rising interest in investments with the prospect of changing usages, such as co-living. However, the challenge remains that these sectors have fewer available listings compared to offices or logistics centers."