At the intersection where Yonsei-ro meets Myeongmul Street, a short walk from Exit 2 of Sinchon Station on Seoul Subway Line 2 toward Hyundai Department Store's Sinchon U-PLEX, banners reading "For Lease" and "Whole Building Available" hang across the plate-glass windows of a ground-floor space next door to the U-PLEX. It is the choicest spot in the Sinchon commercial district. A seven-story building fronting Yonsei-ro has filled only four floors, and one three-story building in a back alley stands entirely empty. "Before COVID, a ground-floor space at this intersection or a shop at the entrance to Myeongmul Street could command tens of millions of won in key money. Now it is hard to find a tenant even with no key money at all," the head of a nearby brokerage said. "In the back alleys, owners fill vacancies by cutting rents, but on the main road they cannot even do that, for fear of driving down the value of the building."
As the downturn among small business owners drags on, investment in so-called small commercial buildings — once a popular retirement plan for Koreans leaving the workforce — is running into trouble. Vacancy rates keep climbing, and with interest rates also rising, a growing number of owners are struggling just to cover the interest on their loans.
The vacancy rate for general retail space in Seoul stood at 9.4% in the second quarter, the highest in about five years, or since the fourth quarter of 2021, according to a commercial property leasing survey released by the Korea Real Estate Board on the 4th.
Conditions have deteriorated to levels seen at the peak of the pandemic in districts that relied on foot traffic and nearby residential demand, such as Sinchon-Ewha and Jamsil-Songpa. In Sinchon-Ewha, where the general retail vacancy rate had climbed to 14.7% in the fourth quarter of 2021, the figure fell to 7.1% by the second quarter of 2023 in what looked like a recovery, only to worsen again and jump to 12.1% in the second quarter of this year. Jamsil-Songpa had boasted solid underlying demand, with its vacancy rate peaking at 13.2% even during the pandemic, but the rate surged to 16.6% in both the first and second quarters of this year. In the Sinsa Station district of Gangnam, where Garosu-gil has continued to lose ground, the vacancy rate reached 18% in the second quarter, exceeding its pandemic high of 15.2%.
The gap between neighborhoods, however, is stark. With the number of foreign tourists visiting Korea surging this year, some areas drawing heavy spending by overseas visitors have shaken off the pandemic slump quickly. Myeongdong is the leading example. Its vacancy rate had spiked to 50.1% in the fourth quarter of 2021, at the height of the pandemic, but fell to 5.1% in the first quarter of this year and 6.3% in the second, effectively entering a recovery. The Ttukseom (Seongsu) district has also established itself as a mecca for pop-up stores and a shopping destination for foreign visitors, with a second-quarter vacancy rate of 2.2%, leaving almost no empty space.
Rising vacancies are also eating into returns for investors in small commercial buildings. Second-quarter rental income yields in the Sinchon-Ewha and Jamsil-Songpa districts came to 0.67% and 0.44% respectively, or 2.7% and 1.8% on a simple annualized basis, according to the Korea Real Estate Board. With bank deposit rates recently ranging between 3% and 4% a year, those returns fall short of what a savings account pays. "Small buildings in Myeongdong and Seongsu have seen sale prices surge over the past year or two, which makes them hard to approach as income-generating property, but investor interest remains high because of the prospect of large capital gains," the head of a building brokerage said. "In districts where vacancies are not being filled, by contrast, there are many cases in which no deal has closed for years, and there are likely no small number of owners swallowing losses year after year because they have no other choice."
The divergence is expected to continue for some time. Foreign tourists are leading the revival of Seoul's commercial districts, so destination areas that visitors seek out for sightseeing and brand-name shopping — Myeongdong, Seongsu and Dosan-daero among them — are seeing rents and sale prices surge, while districts that serve everyday local needs face a slower recovery in domestic demand. In Sinchon-Ewha and Sinsa, though, effective rents are falling through arrangements such as rent-free periods, which some advisers say works in favor of rental yields. "With the small-business downturn making it hard to raise retail rents right now, owners under pressure to sell sometimes cut asking prices sharply to bring yields up to around 4%," the head of a brokerage in Sinchon said.
