Economies of scale prompts healthy take-up of logistics space

• The net absorption of overall SCA recorded 174,000 pyeong in the quarter. Unlike the previous quarter, when new centres accounted for 88% of the net absorption, leasing activity in the quarter was bullish in existing centres as well. Hence, net absorption in new centres accounted for only 55%. Large take-up was underpinned by robust consolidation and modernisation demand.
• The South submarket had the largest net absorption in 2Q23. The South welcomed a variety of tenants in the quarter, including consumer electronics, F&B, 3PL, e-commerce, and pharmaceuticals. The South-east and the West submarkets followed the South, with several 3PLs in the South-east and e-commerce and 3PL companies in the West.

Vacancy rate has been on the rise for a six-quarter streak

• In the quarter, fifteen new centres were completed in SCA, the second-largest construction area since the previous quarter. Six new centres were built in the South, four in the West, and five in the South-east. The area of completed centres in the West was the largest at 461,800 sqm, but the number of centres built was the highest in the South.
• The vacancy rate of SCA stood at 16.0%, up 342 bps q-o-q due to the new supply of centres. Vacancy rates in the South, South-east, and the West increased compared to the previous quarter, and decreased slightly in the Central. The North continued to record a 0% vacancy rate.

Rent changes relatively minimal

• In 2Q23, overall net effective rent for dry storage space in SCA was KRW 30,301, virtually flat q-o-q and increasing 1.8% on a y-o-y basis. Rents in almost all submarkets increased slightly, except in the West where rents fell by -1.8% q-o-q as some landlords lowered rents to quickly increase occupancy.
• The quarterly logistics transaction volume recorded about KRW 995 billion. The most noteworthy transaction in the quarter was for CBRE IM West Icheon Logistics Center, which was sold by CBRE Investment Management to Mapletree Logistics Trust for approximately KRW 144.8 billion. Icheon 7 Logistics Center was traded to Kendall Square REIT from BRIC Properties for approximately KRW 137.5 billion.

Outlook: Upcoming supply volume subject to change

• Despite the high development costs, landlords are hesitant to hike their rents. Cap rates could expand, which would depend on the borrowing rate movement. Investment appetite will likely remain low for logistics assets in fringe locations or those having a high proportion of cold storage.
• Due to the subdued project financing (PF) market, it is difficult to secure construction costs, which is delaying supply. The supply projection could be reduced due to longer completion times. Furthermore, there will likely be an increasing number of developers who are unable to start construction due to the inability to secure financing.