At the intersection running from Exit 2 of Sinchon Station on Subway Line 2 toward the Hyundai Department Store Sinchon branch U-PLEX, banners reading "For Lease" and "Whole Building Available" lined the ground-floor glass front of the building next to U-PLEX. The crossing, where Yonsei-ro meets Myeongmul Street, is the prime spot of the Sinchon commercial district. A seven-story building fronting Yonsei-ro had only four floors occupied, and in a back alley, an entire three-story building stood vacant.
The head of a nearby brokerage said shops at the ground floor of the intersection or at the entrance to Myeongmul Street commanded tens of millions of won in key money before the pandemic, but now it is hard to find tenants even with no key money required. "Inside the alleys, landlords barely fill vacancies by cutting rents, but on the main road they cannot even do that, for fear of dragging down building values," the broker said.
As the downturn in small business drags on, the "mini buildings" once prized as retirement investments by retirees are also in trouble. With retail vacancy rates climbing and interest rates rising, a growing number of owners are struggling to cover loan interest with rental income alone.
According to a commercial real estate rental market survey by the Korea Real Estate Board released on the 4th, the vacancy rate for general retail space in Seoul stood at 9.4% in the second quarter, the highest in about five years, since the fourth quarter of 2021.
Districts that grew on foot traffic and nearby residential demand, such as Sinchon-Ewha and Jamsil-Songpa, have seen vacancies rise to levels close to the peak of the pandemic. The general retail vacancy rate in Sinchon-Ewha surged to 14.7% in the fourth quarter of 2021, then fell to 7.1% in the second quarter of 2023 in a sign of recovery, before climbing again to 12.1% in the second quarter of this year.
The situation in Jamsil-Songpa is worse. The area boasted such solid underlying demand that its vacancy rate peaked at just 13.2% even during the pandemic, but it jumped to 16.6% in both the first and second quarters of this year. In the Sinsa Station district of Gangnam, where the slump along Garosu-gil has continued, the vacancy rate reached 18% in the second quarter, exceeding the pandemic-era high of 15.2%.
Districts drawing foreign tourists, by contrast, are recovering quickly, sharpening the divide between areas. Myeongdong is the clearest example. Its vacancy rate reached 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 emerging from the slump. In the Ttukseom (Seongsu) district, now established as a hub for pop-up stores and a shopping destination for foreign visitors, the vacancy rate was just 2.2% in the second quarter, leaving almost no empty storefronts.
Higher vacancy rates are also hitting returns for mini-building investors. Board data showed income yields from rents in the Sinchon-Ewha and Jamsil-Songpa districts were 0.67% and 0.44%, respectively, in the second quarter. On a simple annualized basis, that works out to about 2.7% and 1.8%. With bank deposit rates recently ranging from 3% to 4% a year, those returns fall short of what a bank account pays.
The head of a building brokerage firm said mini buildings in Myeongdong and Seongsu have often seen sharp price gains over the past one to two years, making them hard to approach as income-generating property, though investor interest remains high because of the prospect of large capital gains. "In districts where vacancies are not being filled, by contrast, there are many cases where no deal has gone through for years, so there are likely quite a few owners taking losses every year with no other choice," the broker said.
The divide across Seoul's commercial districts is expected to persist for some time. With foreign tourists leading the recovery, rents and sale prices are jumping in destination districts such as Myeongdong, Seongsu and Dosan-daero, where visitors come for tourism and brand shopping, while recovery is slower in neighborhood districts that depend on domestic consumption.
Even so, some districts such as Sinchon-Ewha and Sinsa are seeing effective rents fall through arrangements like rent-free periods, and some suggest that if purchase prices drop far enough, this could create an opportunity in terms of rental yields.
The head of a brokerage in Sinchon said the small business downturn makes it hard to raise retail rents right away, so owners in a hurry to sell sometimes cut asking prices sharply to bring yields up to around 4%.
