Interest Rate Cuts Begin in 2025, But Commercial Real Estate Investment Market Still Impacted by High Rates
Jin Won-chang, Director of Big Data Consulting Team at RSQUARE
Director Jin Won-chang assessed that "the market is in the process of finding a balance between 'expectations' and 'reality,'" adding that "as interest rate cuts begin, investor sentiment is gradually improving." He explained, "In the office market, total transaction volume recovered to 10 trillion won last year, but a major factor was the significant increase in strategic investors, represented by corporations, purchasing small to medium-sized premium assets, particularly in the GBD (Gangnam Business District). This demonstrates that it is still difficult to attract large-scale funding in the market due to elevated interest rates."
However, persistently high interest rates remain a constraining factor in the market. Director Jin stated, "Project financing (PF) and lending conditions have not significantly improved, requiring more time for actual transaction market recovery," and predicted that "the interest rate gap between premium and non-premium assets will continue for the time being."
He also pointed out that market uncertainty is intensifying as the second term of the Trump administration in the US coincides with domestic political instability.
"Changes in the Trump administration's foreign policy and domestic political turmoil could weaken economic entities' confidence, potentially dampening investment sentiment. In particular, Korea's slowing economic growth rate and financial market volatility could negatively impact commercial real estate investment."
Logistics Center Market Expected to Regain Supply-Demand Balance Around 2027
According to a recent RSQUARE report, new supply of logistics centers decreased to 6% in the second half of 2024. Regarding the structural causes of this supply decrease, Director Jin pointed out, "The decrease in new logistics center supply is the result of various structural factors," and indicated that "the key cause is the difficulty in securing project financing (PF)."
He explained, "The current domestic real estate PF structure is characterized by low equity investment by developers and high reliance on guarantees," and "this structural vulnerability, combined with rising interest rates, has led financial institutions to adopt a conservative attitude toward lending." He added, "The overall construction industry recession is also a major factor," and "as the burden of financing increases, the development pace of logistics centers is generally slowing down."
Although the vacancy rate of dry storage logistics centers has improved to 16% compared to the previous period, rental rates have remained stagnant for two years. When asked when this supply-demand imbalance is expected to be resolved, he explained, "For dry storage logistics centers, stable supply-demand balance is expected to be found around 2027," and "this is a natural adjustment period needed for the market to absorb the previous oversupply."
Director Jin emphasized, "A notable point is the polarization phenomenon based on location," and "logistics centers with excellent locations that offer superior access to Seoul and convenient transportation will maintain steady demand, and rental increases will be possible from 2025 onward."
Office Market: Intensifying Regional Differentiation and Polarization
Seoul's regional office markets are showing distinct differentiation according to their respective characteristics. According to 'RSQUARE Analytics (RA)', the vacancy rate in the Central Business District (CBD) has slightly increased to 3.1%. He explained, "Due to the regional characteristic of being densely populated with government agencies and major corporate headquarters, the renewal rate of existing tenants is high, maintaining an overall stable market." He added, "However, recently, some major corporations relocating to outskirts for cost reduction has contributed to the rise in vacancy rates."
The Gangnam Business District (GBD) is the strongest performing region. Director Jin analyzed, "The vacancy rate is around 2%, the lowest in Seoul, and rental rates continue to rise," explaining that "this is because steady demand from IT companies and global corporations continues amid limited new supply." He also noted that "prime-grade offices centered around Teheran-ro continue to show high rental competitiveness."
The Yeouido Business District (YBD) has been showing distinct strength recently. Director Jin stated, "The vacancy rate is around 1.3%, the lowest in Seoul. It is maintaining a relatively stable market." He explained, "Financial companies form the main tenant base, and even recently constructed prime offices have achieved high pre-lease rates due to rental demand from financial companies."
Polarization between prime-grade offices and small to medium-sized buildings is also intensifying. He mentioned, "Prime-grade offices maintain vacancy rates below 1%, showing remarkable stability," and "even amid growing uncertainty in the global economy, prime-grade offices with quality tenants are actually gaining attention."
In contrast, the small to medium-sized building market is experiencing considerable difficulties. Vacancy rates have risen to 5.4%, and rental increases have stagnated. In particular, he pointed out, "A major issue is that profitability deterioration is accelerating as IT companies and startups, which were major tenants, are moving to non-core business districts."
The second half of 2025 is expected to be a market inflection point with full-scale interest rate cuts and global economic restructuring.
Director Jin predicted, "As interest rate cuts intensify, investor sentiment will gradually improve," and "as capital procurement costs decrease, investors who have been in wait-and-see mode will re-enter the market." He added, "Transactions are likely to become more active, centered around premium assets such as prime-grade offices."
Regarding expected returns and risk factors by asset type over the next six months, he analyzed, "For offices, stable returns of around 3-5% are expected over the next six months," and "particularly prime-grade offices in core locations have high investment attractiveness with low vacancy rates and continuous demand." However, he pointed out, "The possibility of decreased tenant demand due to economic slowdown is a risk factor that needs to be carefully monitored.
Logistics centers are expected to remain steady or show slight increases of 2-3%. Although the current vacancy rate is high at around 23%, market adjustment is underway due to decreased new supply. "Particularly premium logistics centers in the metropolitan area are expected to show gradual recovery."
The sector Director Jin is focusing on is data centers. "High returns of around 5-7% are expected due to accelerated digital transformation and increased cloud demand," but he advised, "However, careful approach is necessary as initial investment costs are large and there are various regulatory risks."
As new investment opportunities that investors should focus on in the current market situation, he cited "data centers and life science-related facilities." He diagnosed, "Amid distinct growth in bio and pharmaceutical industries, demand for specialized real estate such as research labs or special manufacturing facilities is increasing," and "these facilities can be stable investment destinations due to high technical barriers to entry and long-term lease characteristics."
The rental housing market was also cited as a promising investment opportunity. "As financing conditions improve with interest rate cuts, stable demand is expected due to aging population and increase in single-person households. As it is a sector with high social necessity, policy support can also be expected."
In conclusion, investors can find opportunities in both emerging growth sectors and traditional assets. However, his advice is that careful approach is necessary through thorough analysis of characteristics and risks by sector.
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Interest Rate Cuts Begin in 2025, But Commercial Real Estate Investment Market Still Impacted by High Rates
Jin Won-chang, Director of Big Data Consulting Team at RSQUARE
Director Jin Won-chang assessed that "the market is in the process of finding a balance between 'expectations' and 'reality,'" adding that "as interest rate cuts begin, investor sentiment is gradually improving." He explained, "In the office market, total transaction volume recovered to 10 trillion won last year, but a major factor was the significant increase in strategic investors, represented by corporations, purchasing small to medium-sized premium assets, particularly in the GBD (Gangnam Business District). This demonstrates that it is still difficult to attract large-scale funding in the market due to elevated interest rates."
However, persistently high interest rates remain a constraining factor in the market. Director Jin stated, "Project financing (PF) and lending conditions have not significantly improved, requiring more time for actual transaction market recovery," and predicted that "the interest rate gap between premium and non-premium assets will continue for the time being."
He also pointed out that market uncertainty is intensifying as the second term of the Trump administration in the US coincides with domestic political instability.
"Changes in the Trump administration's foreign policy and domestic political turmoil could weaken economic entities' confidence, potentially dampening investment sentiment. In particular, Korea's slowing economic growth rate and financial market volatility could negatively impact commercial real estate investment."
Logistics Center Market Expected to Regain Supply-Demand Balance Around 2027
According to a recent RSQUARE report, new supply of logistics centers decreased to 6% in the second half of 2024. Regarding the structural causes of this supply decrease, Director Jin pointed out, "The decrease in new logistics center supply is the result of various structural factors," and indicated that "the key cause is the difficulty in securing project financing (PF)."
He explained, "The current domestic real estate PF structure is characterized by low equity investment by developers and high reliance on guarantees," and "this structural vulnerability, combined with rising interest rates, has led financial institutions to adopt a conservative attitude toward lending." He added, "The overall construction industry recession is also a major factor," and "as the burden of financing increases, the development pace of logistics centers is generally slowing down."
Although the vacancy rate of dry storage logistics centers has improved to 16% compared to the previous period, rental rates have remained stagnant for two years. When asked when this supply-demand imbalance is expected to be resolved, he explained, "For dry storage logistics centers, stable supply-demand balance is expected to be found around 2027," and "this is a natural adjustment period needed for the market to absorb the previous oversupply."
Director Jin emphasized, "A notable point is the polarization phenomenon based on location," and "logistics centers with excellent locations that offer superior access to Seoul and convenient transportation will maintain steady demand, and rental increases will be possible from 2025 onward."
Office Market: Intensifying Regional Differentiation and Polarization
Seoul's regional office markets are showing distinct differentiation according to their respective characteristics. According to 'RSQUARE Analytics (RA)', the vacancy rate in the Central Business District (CBD) has slightly increased to 3.1%. He explained, "Due to the regional characteristic of being densely populated with government agencies and major corporate headquarters, the renewal rate of existing tenants is high, maintaining an overall stable market." He added, "However, recently, some major corporations relocating to outskirts for cost reduction has contributed to the rise in vacancy rates."
The Gangnam Business District (GBD) is the strongest performing region. Director Jin analyzed, "The vacancy rate is around 2%, the lowest in Seoul, and rental rates continue to rise," explaining that "this is because steady demand from IT companies and global corporations continues amid limited new supply." He also noted that "prime-grade offices centered around Teheran-ro continue to show high rental competitiveness."
The Yeouido Business District (YBD) has been showing distinct strength recently. Director Jin stated, "The vacancy rate is around 1.3%, the lowest in Seoul. It is maintaining a relatively stable market." He explained, "Financial companies form the main tenant base, and even recently constructed prime offices have achieved high pre-lease rates due to rental demand from financial companies."
Polarization between prime-grade offices and small to medium-sized buildings is also intensifying. He mentioned, "Prime-grade offices maintain vacancy rates below 1%, showing remarkable stability," and "even amid growing uncertainty in the global economy, prime-grade offices with quality tenants are actually gaining attention."
In contrast, the small to medium-sized building market is experiencing considerable difficulties. Vacancy rates have risen to 5.4%, and rental increases have stagnated. In particular, he pointed out, "A major issue is that profitability deterioration is accelerating as IT companies and startups, which were major tenants, are moving to non-core business districts."
The second half of 2025 is expected to be a market inflection point with full-scale interest rate cuts and global economic restructuring.
Director Jin predicted, "As interest rate cuts intensify, investor sentiment will gradually improve," and "as capital procurement costs decrease, investors who have been in wait-and-see mode will re-enter the market." He added, "Transactions are likely to become more active, centered around premium assets such as prime-grade offices."
Regarding expected returns and risk factors by asset type over the next six months, he analyzed, "For offices, stable returns of around 3-5% are expected over the next six months," and "particularly prime-grade offices in core locations have high investment attractiveness with low vacancy rates and continuous demand." However, he pointed out, "The possibility of decreased tenant demand due to economic slowdown is a risk factor that needs to be carefully monitored.
Logistics centers are expected to remain steady or show slight increases of 2-3%. Although the current vacancy rate is high at around 23%, market adjustment is underway due to decreased new supply. "Particularly premium logistics centers in the metropolitan area are expected to show gradual recovery."
The sector Director Jin is focusing on is data centers. "High returns of around 5-7% are expected due to accelerated digital transformation and increased cloud demand," but he advised, "However, careful approach is necessary as initial investment costs are large and there are various regulatory risks."
As new investment opportunities that investors should focus on in the current market situation, he cited "data centers and life science-related facilities." He diagnosed, "Amid distinct growth in bio and pharmaceutical industries, demand for specialized real estate such as research labs or special manufacturing facilities is increasing," and "these facilities can be stable investment destinations due to high technical barriers to entry and long-term lease characteristics."
The rental housing market was also cited as a promising investment opportunity. "As financing conditions improve with interest rate cuts, stable demand is expected due to aging population and increase in single-person households. As it is a sector with high social necessity, policy support can also be expected."
In conclusion, investors can find opportunities in both emerging growth sectors and traditional assets. However, his advice is that careful approach is necessary through thorough analysis of characteristics and risks by sector.