A GREAT RESHUFFLING of the SEOUL OFFICE MARKET IS UNDERWAY Seoul Office Market Outlook and Major Trends COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 11 DECEMBER 2020

COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 11 DECEMBER 2020

Judy Jang Associate Director | Research | Korea +82 2 6325 1918 [email protected]

Robert Wilkinson Managing Director | Korea +82 2 6325 1901 [email protected]

A GREAT RESHUFFLING OF THE SEOUL OFFICE MARKET IS UNDERWAY Seoul office market outlook and major trends COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 11 DECEMBER 2020

Summary & Recommendations Growth in flexible Financial tenants Decentralization has become a prominent workspace demand planning for upgrades trend in the Seoul office market. The Catalyzed by Covid-19, the flexible As new supply increases in Yeouido, original structure of the market was workspace market is rapidly growing the Wall Street of Korea, major local defined by three industry clusters and the as demand for shared and distributed securities companies and financial three key submarkets of Gangnam, offices increases to meet the needs of groups are planning to relocate their Yeouido, and the CBD. The market is companies seeking flexibility offices into new buildings. changing shape as major companies against economic uncertainty. increasingly move between submarkets and as public institutions relocate out of the city. In addition, Covid-19 has prompted more companies to establish The spread of New submarkets shared offices and satellite offices, causing decentralization to accelerate. satellite offices taking shape

> We expect tech tenants to continue to New office areas such as Pangyoand prefer the Gangnam area. We Unlike the past when all employees and groups worked together in the Magok are on the path to being recommend tech tenants to watch for same CBD office buildings, major office markets, joining the leasing opportunities created by large companies are actively establishing existing three major office corporations relocating out of the GBD. satellite offices closer to where submarkets: the CBD GBD and the YBD. > Beyond the GBD we recommend tech workers live. tenants consider the Pangyoarea for expansion and for biotech-industry tenants to consider Magokdistrict as increasingly viable alternatives. Tech tenants Public institutions are > In 2021, with new buildings scheduled continue to grow moving to the suburbs for completion, we expect a tenant- friendly market to persist in Yeouido. Due to Covid-19, leasing activities of After the first public institution Therefore, tenants should leverage traditional companies (i.e. relocation policy was completed, the opportunities to save costs, such as manufacturing) have decreased, Korean government is discussing a rent-free periods for new office while leasing activities of tech second round of relocations. tenants. tenants, especially fintech and This holds potential to open up e-commerce companies, space for other companies to remain active. expand into. 2 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 11 DECEMBER 2020

In 2020, the Korean office market was affected by oversupply in Yeouido and YBD Covid-19. These factors led to stagnant demand for office leasing in About 57,000 sqm of office space at the Yeouido MBC site development area traditional industries such as manufacturing. Despite economic uncertainty, leasing demand from tech tenants has remained steady. Also, many is scheduled for redevelopment by 2022. In 2023, we expect 142,087 sqm in TP Tower (Teachers’ Pension office building), to become available as well. companies have adjusted their leasing plans to incorporate satellite offices When reconstruction of TP Tower is completed, Teachers’ Pension, currently to prepare for the post-Covid-19 era. leasing space in the FKI building, is expected to lease floors in the new In addition, the finance industry tenants are actively involved in leasing building, with the remainder to be leased out to other tenants. The YBD activities to seize opportunities before a wave of supply hits Yeouido. We vacancy rate reached a record high in 2020 as newly-built Parc 1 and Post recommend tenants monitor the key trends of the Korean office market and Tower in Yeouido experienced difficulties filling vacant spacesince 2H20. modify their leasing strategies to follow the post-Covid-19 trends towards Starting in 2021, the outlook for the YBD vacancy rate hinges on how quickly greater decentralization. newly-built prime offices can find new tenants.

MARKET OUTLOOK BY SUBMARKET Submarket Property Area (sqm) Completion Note CBD K Square City 39,624 Q1 2021 Renovation (Citibank Headquarters) K Square City (formerly Citibank Headquarters) is scheduled to complete after remodeling in 2021. As new office supply decreases after 2021, we Bongnae District 1 40,410 2023 Redevelop expect vacancy in the CBD to continue to stabilize. The CBD vacancy rate CBD may rise once again following the planned consolidation of Hana Financial Gongpyeong 15,16 district 116,020 2024 Redevelop Group to the Incheon city in 2023 and redevelopment office supply around the Seoul Station, Seodaemunand Euljiro areas. Euljiro 3-ga 12 District 45,025 2024 Redevelop GBD Center Field Building 168,956 Q1 2021 In the GBD (Gangnam) area, the Center Field Building (the redeveloped (Renaissance redevelopment) Renaissance Hotel) is scheduled for completion. Due to limited supply and GBD steady interest from IT companies, we expect stable vacancy rates going Hyundai Motor Company forward. From an investment standpoint, Colliers expects the GBD area to N/A 2026 Building remain the most competitive investment market in Korea. In 2021, we expect large office relocations to influence the vacancy rate. When Doosan KB Financial Tower 67,683 Q4 2020 Heavy Industries & Construction, currently located in Gangnam Kyobo Tower, Post tower 69,103 Q4 2020 moves to a new building in Bundang, 17 full floors of Gangnam KyoboTower MBC site are slated to become available for leasing. 57,000 2022 YBD (Redevelopment) In the long-term, Samsung Group is planning to re-develop Seosomun Building (formerly JoongAng IlboBuilding) owned by Samsung Life Insurance. TP Tower Upon its completion, we expect financial affiliates of Samsung Group in the (Teachers’ Pension Tower 142,087 2023 GBD to relocate to nearby CBD buildings. For example, Samsung Fire & Development) Marine Insurance, which occupies most of Samsung C&T SeochoTower area Source: Colliers International is already planning for relocation. 3 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 11 DECEMBER 2020

FLEXIBLE WORKSPACE EXPANSION Business strategy changes for shared office operators Instead of leasing and operating the spaces directly, shared officeoperators Increased need for flexible workspaces driven by are opening new locations by signing direct partnership agreements with landlords. Once the building owner builds out a shared office at their own uncertainty expense, the shared office operator operates the space and shares profits Covid-19 has caused uncertainty in the market. Flexibility is becoming a with the owner. We expect this strategy to gain further traction. critical factor for businesses to respond rapidly to changes in business Korean shared office operators are cooperating with asset managers to environment. As more tenants seek flexibility in lease agreements as a create new business models. They participate as investors starting from the hedge against economic uncertainty and cost, the need for flexible development stage. In fact, Fast Five and Mastern Asset Management are workspaces has increased. planning to develop shared office and retail complex buildings at Garosu-gil Local shared office operators lead the market in Sinsa-dong. The emergence of custom-made shared offices designed for satellite office Unlike WeWork, which is in the process of reducing its presence in Korea, or remote office use is a new trend in Korea. Unlike existing shared office Korean flexible office companies, such as Fast Five and Spark Plus, are locations in major submarkets, shared office operators are opening new continuously expanding. Fast Five, the biggest player in Korea by number of offices closer to major residential areas in major cities. Recently, new shared branches, has plans to open its 80th location within three years and is office operator Jipmusiltook the concept of distributed work and is planning preparing for an IPO. to open six branches in 2020. Major flexible workspace operators In the future, we expect shared offices to further expand and evolve into Company Name Number of locations different variations for specific tenant groups. Fast Five 27 WeWork 20 Expecting continuous growth Spark Plus 16 Currently, about 3% of Grade A office space is occupied by flexible workspace IWG (Including Regus and Spaces) 13 operators. JustCo 5 The Executive Center 5 Due to increased demand for satellite offices by large companies, we Source: Colliers International, October 2020 expect that demand for shared offices in Grade B and suburban buildings to rise faster than in Grade A buildings over the near term. In Operators providing services to large companies the long term, we expect demand for shared offices to rise further as companies diversify their way of working. We expect this to lead to Due to the impact of Covid-19, tenants looking for flexible office space are more combined services such as shared kitchens and shared housing. requesting more security and independence within the office rather than a tightshared community designed for easy networking with other tenants in In addition, we expect competition the office. Recently, a new service is attracting attention. Office operating among Korean shared office companies that used to provide custom services only for one-person operators to intensify as they aim companies or small start-ups are expanding their services to large companies to become comprehensive real looking to establish satellite offices or hub-and-spoke offices. estate service operators.

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Hanwha Systems decided to designate their Yeouido business site as the main work SATELLITE OFFICES TAKE HOLD site and establish five additional satellite offices throughout the Seoul metropolitan area. They are in Jangyo-dong, Sinseol-dong, Bulgwang-dong, and Pangyo. Also, Due to Covid-19, major companies are decentralizing their employees can choose their workplace four days per week and are required to work organizations and distributing workspace across multiple satellite from the main office once a week. Hyundai Glovis also has adopted a telecommuting offices. Traditionally, all employees worked in a single system. This shows that both IT companies and large major companies, including headquarters building. However, this centralized strategy is manufacturing companies, are actively rolling out remote work programs. shifting toward decentralized satellite offices with a distributed operation strategy. Due to changes in the work environment, growth in headcount may no longer require expansion of the workspace. With more efficient space utilization, leasing space Rising numbers of Korean companies set up requirements may actually fall. distributed offices For major large companies, occupancy costs may no longer be fixed cost but become a variable cost that depends on their immediate needs at that time. SK Telecom (SKT) analyzed the home addresses of employees to create a “base office” concept where employees can commute to As Covid-19 became a catalyst for decentralized work, Colliers expects more an office within 20 minutes of their place of residence. SKT is companies to adopt distributed offices in near future. Furthermore, companies are planning to launch a flexible working system by establishing 10 likely to invest more in IT systems that support distributed work. Naturally, this distributed office locations within the year. SKT plans to offer should increase demand for cloud computing systems and services. employees a choice of satellite offices within a 10-to-20-minute commute of their home rather than a longer commute to one With the introduction of more branch offices, companies are expected to seek central HQ. After analyzing the commuting distance of employees, buildings with more advanced features. For example, Naver's second office SKT set up four base offices in Jongno, Seodaemun, Bundang, and building, which is scheduled to be built in Pangyo, is being built with state-of- Pangyo. SK Innovation has adapted a “1 week at the office and 3 the-art features to prepare for post-Covid-19 era. This building combines AI weeks from home” system for selected departments. They are technologies and cloud systems to enable distributed work. According to also planning to lease additional offices after a study of employee Naver, it will be built as the world's first robot-friendly building, with facial commuting patterns. recognition entering and exiting the building, AI powered meeting-minute taking, and autonomous robots managing deliveries. NHN, major Korea IT company, has adopted a remote work system after their first telecommuting trial. Employees can work from The shared office industry is expected to expand home once a week. Additionally, Coupang opened a smart office steadily to meet more companies’ demand for for developers in Pangyo Techno Valley. satellite offices. As the number of companies Lotte Shopping renovated five Lotte Department Stores into base utilizing work from home and satellite offices offices with 225 seats each. Employees can check the empty seat increases, we expect demand for offices in the status of these five base offices at any time, from anywhere, CBD, GBD, and YBD to be spread across other through their seat reservation system. submarkets and traditionally residential areas.

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TECH TENANTS EXPAND Fintech Among tech tenants, fintechtenants have expanded the fastest. Big tech companies as well According to data from the National Statistical Office, internet as traditional finance companies are actively entering the fintech market. Korean Fintech shopping transactions made through PCs and mobiles in companies Toss and Banksalad, are representative of the explosive growth in this industry. October rose 20.0% from the previous year to KRW14,244.5 As competition in the simple payment businesses such as KakaoPay and Naver Pay billion. In addition, the amount of mobile shopping transactions intensifies, fintech companies are likely to expand. increased 22.9% from the previous year to KRW9,535.5 billion, the highest ever recorded. With the widespread adoption of E-commerce smartphones and e-commerce, the number of IT startups has E-commerce is expected to lead the expansion of non-face-to-face business. In the grown steadily. This has led tech tenants to become a major aftermath of Covid-19, e-commerce operators such as eBay, Coupang, and 11th Street are driver of office market demand. expanding faster. Gangnam Tehran Valley area is the ideal leasing office area in Large Korean distributors such as Shinsegaeand Lotte are also expanding their e-commerce terms of infrastructure and transportation options for business through SSG.com and Lotte-on. Fierce competition is expected between traditional technology tenants. Today, tech tenants continue to prefer the distributors and e-commerce platform operators. In addition, we expect rapid expansion of Gangnam area. Most global big tech companies, fintech, and e- big-tech internet portal sites and new small-to-medium-sized e-commerce companies, commerce companies are located in this area. The Gangnam naturally leading to more leasing requirements from companies in this sector. office market has the lowest vacancy rate among the three office submarkets in Seoul due to the lack of Grade A office supply combined with steady leasing demand from tech Major Tech Occupies in Korea tenants. Big Tech Fintech Big Tech Big Tech Big Tech IBM Google Toss Intel Micro soft Global big tech companies such as Google, Amazon, and Amazon E-commerce Facebook are all located in the Gangnam area and are Fintech Facebook E-bay continuously expanding in the Korean market. For example, the Bank salad Cupang upcoming Center Field Building pre-leased space to Amazon and Facebook before completion. With additional new high- CBD quality offices scheduled for completion in this area, we expect YBD relocation demand from global big tech companies to further GBD increase. Gangnam Tehran Valley offers a dense concentration of tech companies that is good for networking and collaboration. However, companies with large space requirements should consider the Pangyo Techno Valley area, given the insufficient supply of Grade A offices in Gangnam. For Big Tech this reason, the headquarters of Korean big tech companies, Pangyo Naver Naver and Kakao, are located in Pangyo. Kakao Source: Colliers International 6 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 11 DECEMBER 2020

FINANCIAL FIRMS PLAN TO Tenant Distribution by Industry UPGRADE & RELOCATE Banking, Finance and Insurance 36.8% Financial tenants account for 36.8% of occupancy in Grade A offices. This Manufacturing / Energy 19.6% demonstrates the importance of financial tenants in the prime office leasing market. IT/Technology/BPO/Software 9.9% With an increase in office supply in Yeouido in 2020, financial tenants are Professional Services / Legal 9.1% taking advantage of leasing opportunities becoming available in new buildings to upgrade their premises. We expect relocation of large financial tenants, Others 9.0% which began in 2H20, to continue in 2021. Public & Government & Non-profit 5.1% Relocation of Securities companies to new YBD offices Telecom, Media, Communications 4.3% Relocations of large securities companies to new YBD buildings are at various Construction / Engineering 3.8% stages of planning. New offices such as Parc 1, Yeouido Post Tower, and KB Flexible workspace 2.4% Financial Town were completed in 2H20. Most securities firms are planning a Source: Colliers International move into one of the new buildings. NH Investment & Securities, the new owner of Parc 1 Tower 2, is scheduled to Expected Major Relocations of Banking and Finance Firms in YBD move into the building. KTB Investment & Securities and CAPE Investment & Tenant Current Building Planned Destination Securities plan to move into Post Tower. In addition, Hanwha Investment & KTB Investment & KTB Building Post Tower Securities and eBestInvestment & Securities are also considering relocating Securities from their offices near Yeouido station to new buildings, before current leases CAPEInvestment & Yusu Holdings Building Post Tower expire. Securities eBestInvestment & KT Yeouido Building Post Tower Relocation of financial services offices is a long-term Securities trend Eugene Group Eugene Group office building Parc 1 Tower 1 affiliates Hana Financial Group, which has its headquarters and various affiliates located NH Investment & NH Investment Securities in the CBD, has plans to relocate to Incheon Cheongna International City Parc 1 Tower 2 Securities Building around 2023. Hanwha Investment Scheduled to be Hanwha Insurance Building In the long run, Samsung Fire & Marine Insurance, Samsung Securities, & Securities relocated Samsung SRA, Samsung Asset Management and other financial affiliates of KB Financial KB Financial Holdings SewoohoeBuilding Samsung Group in Gangnam area are planning to relocate to the CBD once Town redevelopment of integrated office building in the CBD is completed. The plans KB Financial KB Insurance KB Finance Tower to move headquarters of Samsung financial affiliates located in CBD and GBD Town are also expected to affect the Korean office lease market movement. Source: Colliers International

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NEW SUBMARKETS EMERGING The emergence and expansion of new office areas Many tech tenants from the Tehran Valley in Gangnam have relocated Submarkets are no longer defined by industry to Pangyo. We expect the 2nd Techno Valley in Pangyoto be completed over the next year, which should push Pangyo to emerge as the fourth The three major submarkets traditionally had an industry focus: finance in the CBD, major office cluster in the Seoul area. IT in the GBD area, and securities companies in YBD. Recently, these clusters have become less defined as benefits to a CBD and YBD location begin to outpace the GBD In addition, the Magok district is rapidly emerging as a center for the area. Also, supply shortage in the GBD, continues to drive tenants to other biotech industry. In Magok, the largest R&D complex in Korea, submarkets. More recently, the rise of remote work, expansion of IT infrastructure, “LG Science Park,” with a total floor area of 1.11 million square metres and growth of shared offices are also contributing to a breakdown of the traditional (about 335,000 pyeong), is under construction on a site of about industry clusters. In order to enjoy better tenant benefits when signing a new lease, 170,000 square metres (about 53,000 pyeong). Various LG affiliates, such as rent free and fit out cost support, a rising number of tech tenants are moving including LG Chem, are planning to move to Magok. In the future, we to Yeouido. As more office are built in Yeoido, the YBD has started to become very expect leasing activity to rise as the R&D centers of pharmaceutical and competitive with the GBD. biotech expand as a result of Covid-related growth. For example, a fintech company known for mobile asset management platform Major Submarkets Banksalad, leased Yeouido Parc 1 Tower 1. As fintech combines IT with finance, there is strong rationale for Rainist to move to the YBD where a financial sector cluster is already in place. We recommend Fintech companies to consider relocation to the YBD area. Magok Major corporations considering decentralization DMC CBD The number of large corporations outside the three major office areas is also YBD increasing. Recently, Korea Technology Group (Korea Tire Group) left the Gangnam GBD area and moved its headquarters to the PangyoTechno Valley. In addition, Doosan CBD: Central Business District Heavy Industries & Construction, located in Gangnam Kyobo Tower near Gangnam Historic centre of Seoul, HQ for MNCs, Station, is scheduled to relocate to a new headquarters building in Jeongja-dong, Conglomerates Bundang. Meanwhile, Hyundai Heavy Industries is planning to move into a new 19- GBD: Gangnam Business District Bundang & story PangyoGlobal R&D Center, scheduled for completion in 2022. As the number IT, Tech, Fashion, and Media concentration Pangyo of available large spaces in major areas decreases, more companies are building their YBD: Yeouido Business District own larger spaces in Pangyoand Magokdistricts. Financial and business services

Magok-dong, LG Science Park and Kolon One & Only Tower

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Economic and administrative RELOCATION OF PUBLIC functions in the metropolitan area INSTITUTIONS TO SUBURBS The government is pursuing a policy to reduce overcrowding in the Seoul metropolitan area by relocating major public institutions to suburban areas. According to the relocation policy of public institutions, 153 Metropolitan area Suburbs public institutions from the metropolitan area were relocated to innovative cities and Sejong City in 2019. Top 100 Corporates 91% 9% Recently, public institutions have been actively discussing the second round of relocations. Venture businesses 70% 30% As of June 2020, 85% of public institutions in Korea (345 out of 409), including central administrative agencies, were in the Manufacturers 57% 43% Seoul metropolitan area, according to data from the Ministry of Land. Financial firms 67% 33% Once the second public institution relocation plan is completed, the proportion of public institutions located within the Public institutions 85% 15% metropolitan area is planned to fall from 85% to 35%. 0% 20% 40% 60% 80% 100% It is estimated that about 100 institutions are to be included in the second round of relocations. Among them, a hot issue is Source: Colliers International, Ministry of Land, Infrastructure the possibility of state-owned banks being relocated to outlying areas. Change in the concentration of public institutions Although a final decision is yet to be announced, we expect the pace of government and public institutions relocation out of 85% 35% the city to continue. Metropolitan area When public institutions within core areas of Seoul relocate to the 10 innovative cities designated by the government, or Sejong City, we expect the space left behind in core areas to influence the office market. Suburbs 15% 65% Therefore, tenants are advised to monitor the possibility of large spaces left behind by public institutions as possible sites for expansion or relocation. Source: Colliers International, Ministry of Land, Infrastructure

9 Primary Author: For further information, please contact:

Judy Jang Robert Wilkinson Associate Director | Research | Korea Managing Director | Korea +82 2 6325 1918 +82 2 6325 1901 [email protected] [email protected]

Andrew Haskins Executive Director | Research | Asia +852 2822 0511 [email protected]

Joon Lee Senior Director | CMIS | Korea +82 2 6325 1907 [email protected]

Jay Cho Director | Office Services| Korea +82 2 6325 1905 [email protected]

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Copyright © 2020 Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made toensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.