Rising Building Sales Amid High Vacancy Rates in Commercial Real Estate

High-value building transactions are increasing in Seoul, but the retail rental market is facing growing vacancy pressures. Property owners with high debt levels may struggle to refinance when loans mature if prolonged vacancies reduce rental income, leading to increased financial burdens.

According to Real Estate Planet, the total transaction amount for commercial and office buildings nationwide in the second quarter of this year reached 9.755 trillion won, an 18.1% increase from the previous quarter. Transactions of high-value buildings worth over 30 billion won also rose to 40, a 29.0% increase, with 33 of these transactions (82.5%) concentrated in Seoul.

Despite the rise in high-value building transactions, the retail rental market continues to grapple with vacancy challenges. The national average vacancy rate for general retail spaces reached 13.4% in the second quarter, the highest since records began. According to the Korea Real Estate Agency, the average vacancy rate for small retail spaces in Seoul was 6.4%, but Gangnam had a vacancy rate of 0%, while Hongdae and Hapjeong experienced a significant 14.9% vacancy rate, highlighting disparities among different markets. In Hongdae and Hapjeong, the first-floor rental price per square meter was 63,600 won, exceeding the Seoul average of 52,800 won, yet the area still recorded double-digit vacancy rates.

The issue is that prolonged vacancies can exacerbate financial burdens for property owners with high debt levels. Rental income from retail spaces and buildings is a primary source for repaying loans, meaning discrepancies between expected and actual rental income can impact repayment capacity.

If the loan amount was determined based on anticipated rental income at the time of purchase, vacancies can disrupt financial planning. The higher the debt ratio, the less capacity there is to withstand declines in rental income.

Vacancies reduce monthly rental income, but financial costs continue to accrue. Even if tenants are found, receiving lower-than-expected rental rates may make it difficult to cover interest payments with rental income alone.

Shin Bo-yeon, a professor at Sejong University’s Department of Real Estate AI Convergence, noted, “When selling retail spaces, there are instances where rental rates are set higher than what can realistically be achieved in the market, leading to an overestimation of profitability. When vacancies occur or actual rental rates fall below expectations, the interest costs can exceed rental income, often resulting in negative investment returns.”

Transferring increased financial costs to tenants is also challenging. In markets with high vacancy rates, tenants have many options, which may necessitate lowering rental rates rather than increasing them. Small to medium-sized buildings in weakened markets may struggle to secure the anticipated rental income even if vacant units are filled.

The burden may increase as loan maturities approach. If vacancies and declining rental rates persist, it can affect not only rental income but also property valuations. During maturity assessments, if collateral value or repayment capacity is evaluated as low, the loan limit may be reduced, forcing property owners to cover the shortfall with their own funds.

The same applies during the refinancing process. If financial institutions do not provide funds equivalent to the existing loan amount, property owners who have been managing interest payments may need to secure a lump sum. Failure to obtain the necessary funds could lead to property sales or, following defaults, auctions.

Professor Shin stated, “In a situation where demand for space is declining, failing to secure tenants will only lead to ongoing interest burdens. High leverage can lead to defaults, ultimately resulting in an increase in auctioned properties.”

He added, “Although it is still in the early stages, if defaults increase in conjunction with rising interest rates, it could impact retail spaces and small to medium-sized buildings closely tied to daily life.”