Office lease prices in Seoul marked a record-high increase last year backed by strong demand amid low vacancies, a report released by a real estate analytics firm showed Monday.

Seoul's office lease market has been showing a strong performance, with rent rates being pushed up, a CBRE Korea report showed. The average face rent for Seoul offices posted the sharpest on-year growth of 8.8 percent in 2023, up 2.1 percentage points from the previous year’s 6.7 percent. Face rent is the amount specified in the lease which disregards incentives such as rent-free periods.

The average effective rent, which includes the actual added or deducted variable charges, also advanced by 15.1 percent. The Yeouido Business District showed the sharpest increase at 17.9 percent, while the Gangnam Business District recorded an increase of 15 percent and the Central Business District saw a 13.3 percent increase.

“Office leases in the Yeouido Business District were the main driver behind the price surge as new contracts were sealed after a long period of low vacancies in the area. In addition, rent concession (discounts offered by landlords to tenants) shrank due to limited supply and increasing competition for leases,” the report assessed.

The strong demand brought down the vacancy rate, which is the percentage of all available units in a rental property.

The average vacancy rate for Seoul’s office properties for the fourth quarter stood at 1.5 percent, 0.2 percent lower than the previous quarter. The Gangnam Business District showed the lowest vacancy rate at 0.7 percent, while the figure for the Central Business District remained at 1.1 percent and the Yeouido Business District at 3.6 percent.

All three key office areas in Seoul exhibited vacancies lower than 5 percent, meaning the properties in the areas are nearly "packed." The local real estate industry views 5 percent of office space can be vacant depending on the balance of supply and demand.

The average effective rent for office space per square meter was 35,882 won ($26.90) in the GBD, followed by 32,826 won in the CBD and 27,789 won in the YBD.

Despite the surge in office rents, total transaction volume in the commercial real estate market in Seoul stood at 14.8 trillion won in 2023, showing a nearly 20 percent drop from the year before due to high interest rates. Transaction volume in both office and retail sectors fell, while only logistics boomed to 4.71 trillion won, up around 50 percent on-year.

The report projected the supply of distribution centers to drop from 2024 as there has been a decline in the number of approvals for new establishments recently.

“With the gap in the expected price between the buyer and seller, and the limit in liquidity due to the persisting high rates, the overall volume of the transaction in the office real estate market downsized in 2023,” said Claire Choi, head of research at CBRE Korea.

“But we expect positive changes in 2024, such as a cut on the base interest rate, along with the strong demand for the local office market, the recovery in retail and the stabilization in the logistics sector.”