A cold wind is blowing in the shopping mall market in the metropolitan area due to high interest rates, economic recession, and expansion of the e-commerce market. There are many shopping malls where landlords are making fun of themselves because they cannot find tenants for a long period of time. A sales notice is posted on a commercial building in the Misa district of Hanam, Gyeonggi-do. /Hanam = Reporter Choi Hyuk “/>
The commercial market in the metropolitan area is being devastated by high interest rates and long-term vacancy. There are many shopping malls where landlords are making fun of themselves because they can’t find tenants. In the auction market, the commercial real estate market has frozen, with even ‘half-priced commercial properties’ worth around 50% of the appraised value being ignored.
According to GG Auction, an auction and public auction data company, on the 24th, the number of auctions for commercial properties in the metropolitan area in the first quarter was 1,732, more than double the number in the same period last year (817). This number significantly exceeds the second quarter of 2020 (1,039 cases), which was hit hard by the COVID-19 incident.
In residential areas in the metropolitan area, where there is a large supply of commercial properties, pile auctions are taking place one after another. Nine commercial buildings were auctioned off at once at Bandoyu Square in Gamil District, Hanam, Gyeonggi Province. Seven commercial buildings in Seoyoung Venice Square, a commercial building in Siheung Baegot New Town, are also up for bidding. Goyang Hyang-dong, Gimpo Han River, Hanam Misa, and Gwacheon Knowledge Information Town are also in a similar situation.
In the auction market, shopping malls are in a cold situation. The successful bid price ratio (ratio of successful bid price to appraised price) of commercial properties in the metropolitan area averages 67% in the first quarter, but excluding some high prices, most are less than half the price. Even in these cases, only about 2 out of 10 (success rate 22%) are barely finding a new owner. The second-floor shopping center of Cheongna Square 7 (exclusive area of 137㎡) in Cheongna New Town, Incheon, was sold for 250 million won, 24% of the appraised price (1.06 billion won) after four failed bids.
The explanation is that the contraction of the profitable real estate market is worsening due to the combined effects of prolonged high interest rates, domestic economic recession, and expansion of the e-commerce market. Kang Eun-hyeon, head of the Myeongdo Auction Research Institute at the law firm, said, “Commercial landlords who had been holding out on the expectation that the U.S. central bank would cut interest rates in the first half of the year have reached their breaking point.”
New town commercial facilities mired in vacancy… become a nuisance
On the exterior wall of the building is a ‘Half Price Rent’ banner… Some landlords say, “Just pay the management fee.”
On the 23rd, a banner reading ‘Half Price Rent’ was fluttering on the exterior wall of the Cheongna Square 7 building in the central commercial district of Cheongna International City in Seo-gu, Incheon. About 70% of the 1st and 2nd floor shopping malls were empty, and only the 3rd floor movie theater was operating normally. Mr. A, who runs a store on the second floor of the building, said, “It wasn’t at this level during the COVID-19 outbreak, but since last year, tenants have left one by one,” and added, “Some landlords are even hiring tenants on the condition that they only pay a management fee.”
The commercial real estate market is reaching its limits due to a combination of high interest rates and prolonged vacancy. In the metropolitan area, where many shopping malls and knowledge industry centers have been supplied thanks to the boom in the real estate market over the past 2-3 years, there is a sound of ‘evil’. Landlords who cannot bear the loan interest, let alone make a profit, are choosing to sell their properties below the sale price or go to auction.
◆Frozen transaction… Auction of Tears
Most areas in the metropolitan area are in a similar situation. Gimpo Hangang Dew Class, located in Gurae-dong, Gimpo, Gyeonggi-do, also has 48 out of 51 first-floor shops vacant. At the time of sale in 2022, it was the largest knowledge industry center in the northwest, and investors flocked to it due to news of the development of Gimpo Compact City. However, the vacancy situation has continued since completion last year.
Unlike the apartment complex, where transaction volume has rebounded this year, the situation in the commercial real estate market is worsening. According to the Korea Real Estate Agency, the volume of commercial and office real estate transactions in the metropolitan area was 95,788 last year, a 61% decrease from two years ago (248,987). An official from Gimpo B Certified said, “Since July of last year, the lessor put it up for quick sale at about 50 million won cheaper than the sale price (200 million won), but the transaction itself disappeared.”
If the ‘transaction drought’ phenomenon continues, landlords who cannot cover the loan interest will have no choice but to be forced into auction. There is even talk that “a house across from the house was put up for auction.” An official from C Certified in Janggi-dong, Gimpo said, “The sale price for the 1st floor commercial building with an exclusive area of 66 m2 was 700 million won, but it has been vacant for 4 years,” adding, “Even the leaseholders are in a desperate mood.”
The developer is also backed into a corner. Even commercial units within apartment complexes, which were once called the ‘flower of commercial districts’ and guaranteed successful sales, are showing up as unsold units. The site explained that it is difficult to guarantee sales even if the sale price of a commercial building is reduced by half. An official from a developer who is selling a commercial complex in Gwangju, Gyeonggi-do said, “When the market was good, contracts were easily concluded even if the price was 50 million won per 3.3㎡, but these days, even if it is lowered to 30 million won, the initial contract rate is less than 10%.” He added, “Due to the aftermath of high interest rates,” he said. “There is a growing perception that it is no longer difficult for shopping malls to make a profit,” he said.
◆A good investment destination? Now a ‘trouble’
Oversupply is also considered one of the reasons for the slump in the commercial real estate market. A representative example is the Knowledge Industry Center, which has become a frequent auction site along with shopping malls. A knowledge industry center refers to an apartment-type factory with shops and warehouse facilities on the lower floors and offices on the upper floors. During the real estate boom, it was very popular with investors because it allowed them to avoid loan regulations and resale restrictions, but now no one is looking for it even if it is less than half the appraised value.
According to the Korea Industrial Complex Corporation, as of the end of March, there were 976 knowledge industry centers completed. Of these, 82.7% (808 places) are located in the metropolitan area. Knowledge Industry Center auctions increased by 70.7% from 403 in 2022 to 688 last year, but the success rate fell from 45.0% to 28.9%.
Although shopping malls and knowledge industry centers are pouring into the auction market, experts advise that the risk is still high. This is because interest rate uncertainty and concerns about a domestic economic downturn are acting as variables. Joohyun Lee, a senior researcher at GG Auction, said, “Unless interest rates fall, the number of auction items will continue to increase.” Lee Sang-gyu, CEO of Auction Rock, also said, “Commercial real estate is mostly investment demand, so it is a loss to buy vacant properties at a low price,” but added, “If you are an actual consumer who plans to run your own store, you can buy it at a low price.”
Gimpo = Shim Eun-ji / Incheon = Reporter Han Myeong-hyeon [email protected]
