Seoul Office Over-supply, Can It Solve the Housing Shortage?…New York Is Converting Old Offices to Residential Use

Although nominal rents are rising according to contract terms, the oversupply of office space in downtown Seoul has intensified competition for tenants, leading to effective rents turning negative. Particularly in new office dense areas like Magok, landlords are offering exceptional conditions, such as rent-free periods of up to 5 months, to secure tenants.

Global real estate asset managers typically classify large-scale offices over 99,000 square meters as 'prime' and use this as an important investment criterion. The supply of these prime offices is concentrated in downtown Seoul (CBD), an area that has seen almost no new supply in the past five years. This phenomenon is attributed to a surge in supply as old buildings in the CBD are demolished and new ones are constructed.

The floor area ratio in Seoul's central commercial areas has been significantly raised to over 1000%, leading to the construction of numerous high-rise buildings exceeding this ratio. Public contributions, mandated in exchange for floor area ratio incentives, primarily involve creating parks or green spaces as 'public open spaces.' However, there are cases where these public open spaces are operated like private property by corporations, raising the need for institutional improvements to ensure public accessibility.

Approximately 3.3 million square meters of new office space is planned for downtown Seoul, but concerns about its feasibility arise as most projects are being pursued through Project Financing Vehicle (PFV) schemes. PFV projects are vulnerable to funding issues due to low equity ratios and face potential vacancy crises due to delayed sales or intensified competition for tenants. Competition to attract tenants is already observed to be accelerating starting this year.

Most of the PFV projects currently building large-scale offices in downtown Seoul involve financial institutions. The primary objective of these projects is not permanent ownership of the offices but rather to generate profits through sales after completion. With low equity ratios, delayed sales increase financial burdens. The impending completion of Rene Square and G1 Office this year suggests that simultaneous completions and sales strategies will impact the market.

Foreign investors are raising doubts about the plan to supply a massive 3.3 million square meters of office space in downtown Seoul. This could lead to the hollowing out of the city center in the evenings. There is a growing consensus that a mixed-use development approach, integrating residential, commercial, and office facilities—like in New York or Tokyo—is necessary.

In the United States, 'office conversion' is actively being pursued to transform office buildings into residential facilities (multifamily) or hotels to address office vacancy issues and alleviate the housing shortage. More than 200 office conversion projects are expected to proceed after 2026, demonstrating ongoing efforts to efficiently utilize office buildings.

In the past, New York City offered tax benefits for simple office-to-residential conversions. However, recent policy changes now provide property tax abatements only if at least 25% of the new housing supply is mandated as affordable housing. This demonstrates an aggressive policy direction aimed at increasing housing supply while curbing rent increases.

The biggest technical challenge when converting office buildings to residential facilities is the fixed nature of the building's core (where elevators, restrooms, and plumbing are concentrated). With elevators and restrooms clustered in one area within a large office floor plan, it is extremely difficult to divide the space into individual residential units and install new restrooms and kitchen plumbing in each. This has led to proposals for indirect conversion methods, such as dormitory-style or co-living models.

Korea's residential regulations are stricter than those in the U.S., posing difficulties for office-to-residential conversion. Mandatory floor heating, strict ventilation standards, and energy efficiency regulations, in particular, demand high costs and technical complexity for office remodeling. Additionally, the lack of penalties for aging buildings means property owners have little incentive to attempt conversion. Given that Korean architects are involved in successful overseas projects, it is suggested that domestic regulatory improvements should leverage their experience.

It is argued that tax policies alone cannot control home prices, and analysis suggests that expanding supply can stabilize prices, as demonstrated by the office market. The phenomenon of falling rents due to office oversupply indicates that if sufficient supply is provided in the housing market, market dynamism can be restored, contributing to home price stability. Therefore, there is growing support for a policy shift towards supply-centric measures.

The key to ensuring the profitability of high-rise office buildings in downtown Seoul, such as in Gwanghwamun and Euljiro, lies in 'aggressive floor area ratio incentives.' By significantly increasing the existing 300-400% floor area ratio to 1,000% or even over 1,200%, construction companies were able to pursue large-scale projects based on high profitability. Such dramatic floor area ratio incentives can be an important means to dispel perceptions of supply shortages and promote urban development.

One of the biggest problems in the Korean government's housing policy is the conversion of public rental housing to private ownership. By allowing residents to purchase public rental homes after a certain period, a long-term shortage of stable public housing stock has emerged. Critics argue that this prevents public rental housing from fulfilling its original role of stabilizing housing for low-income citizens and has created a side effect where winning a public housing lottery is seen as a 'lotto'.

To enhance the professionalism and efficiency of redevelopment projects, policies have been changed to allow external experts to be hired as heads of redevelopment associations, addressing issues of absence or lack of expertise. External individuals without membership stakes can now participate as managers, promote projects, and receive incentives. While intended to revitalize redevelopment projects, the actual effects remain to be seen.

Concerns are raised that if old multi-household homes or villas are redeveloped into new villas or officetels, low-income residents who previously lived in affordable housing might be displaced by higher rent burdens. Since their income levels prevent them from affording expensive areas, it is crucial to significantly expand public rental housing, including in suburban areas. The importance of normalizing the private rental housing market to increase the supply of small-sized housing is also emphasized.

It is argued that the government's excessive regulation, maintained due to housing market instability, can be counterproductive. Rather than trying to solve all housing problems directly, the government should deregulate and provide institutional support to activate various private rental housing models (e.g., dormitories, co-living). It is emphasized that the government sending a signal to activate supply in the market would be more effective in solving housing issues.