[Real Beat] US Offices Have Surplus Space, Korea Faces Shortage 'Chaos'... Why the Difference? [Office Shift] (20)

Interview with Cushman Korea Executives Choi Yongjun and Lee Jaehong
US-Korea Office Vacancy Rates Show 'Polar Opposite' Trends
Domestic Companies Increasing Office Renovations for 'Collaboration'

Editor's Note[Jjinbit] is short for 'Jung Hyunjin's Business Trend' and 'Real Business Trend,' a segment that showcases trends in the changing nature of work. The segment within Jjinbit called 'Office Shift' closely examines the changes in offices triggered by the COVID-19 pandemic and aims to lay the groundwork for exploring answers to new work styles through experiments we have conducted together. It comes to you every Saturday and Sunday morning. After 40 installments, it will also be available as a book.

[Photo by Unsplash]

The average office vacancy rate in the United States exceeded 18% in the first quarter of this year, continuing its upward trend. San Francisco, near Silicon Valley, is approaching 25%. The demand for office space in the U.S. has significantly decreased to the point of causing instability in the commercial real estate market. This is completely different from the domestic situation, where the average vacancy rate for Grade A offices is around 2%. In Seoul's Gangnam district, the vacancy rate is less than 1%. While offices are in short supply in Seoul, causing rents to rise at the highest rate in over a decade, rents in the U.S. are steadily falling.

What explains such extreme differences in the office real estate markets between the two countries? Could the work-from-home experiments that spread due to COVID-19 have influenced these differences?

Choi Yongjun, Executive Director and Head of the Office Tenant Advisory Group at Cushman & Wakefield Korea, a global real estate consulting firm, recently explained these questions in an interview with Asia Economy from the perspectives of office demand and supply. While various factors such as economic conditions and corporate structures must be considered, broadly speaking, the U.S. continued office supply but saw demand decrease due to expanded remote work. Conversely, in Korea, office supply sharply declined?described as a 'cliff'?but companies expecting a reduction in remote work moved to secure office space, leading to increased demand. (Reference: April 8, 2023, '[Jjinbit] How Apartment Remote Work Differs from Housing Remote Work [Office Shift](17)')

As a result, domestic companies are focusing on reorganizing and optimizing existing office spaces. While adapting to new work styles, companies are paying attention to the needs of employees returning to the office. Lee Jaehong, Executive Director of Project Development Services (PDS) at Cushman Korea, emphasized, "Whereas companies previously focused simply on configuring office spaces as places to work, they are now concentrating more on the experiences employees have within those spaces."

We asked two experts from Cushman Korea about the changes in domestic offices caused by remote work now that we have entered the endemic phase. Cushman & Wakefield, founded in 1917 in New York, is a global comprehensive real estate services firm with over 50,000 professionals operating in more than 400 locations across 60 countries. It provides specialized services related to real estate transactions such as buying, selling, leasing, and asset management, as well as advisory services including space design.

Executive Director Jae-Hong Lee and Executive Director Yong-Jun Choi of Cushman & Wakefield Korea (Photo by Cushman Korea)

- Why is there such a difference in office vacancy rates between major cities in Korea and the U.S.?

▲ Executive Director Choi (hereafter Choi): It is difficult to apply the same standards across countries. Many factors must be considered, including economic conditions, corporate structures, corporate culture, and the supply and demand status of commercial offices. In Manhattan, U.S., continuous new supply is accompanied by remodeling of existing buildings. Due to changes in work styles such as full remote work or three days a week remote work starting with big tech companies, vacancy rates are expected to rise further.

On the other hand, in Korea, companies that benefited during the COVID-19 period grew and occupied most of the office space in Gangnam, and even before new supply occurred, leasing had already expanded significantly. Companies that had temporarily adopted remote work as an operational policy secured space to accommodate employees returning to the office. Consequently, rents in Gangnam increased, and traditional tenants in Gangnam moved to Yeouido and northern Seoul, causing vacancy rates in other areas to fall and rents to rise overall. Behind this was a steep supply cliff season because investors, having experienced difficulties from accumulated commercial office vacancies over the past decade, showed little interest in commercial office development.

- Has the emergence of new work styles such as remote work and hybrid work after COVID-19 affected office vacancy rates in Korea?

▲ Choi: Vacancy rate and office space utilization rate are different concepts. Vacancy rate refers to the proportion of empty space without contracted tenants, while utilization rate refers to how frequently leased spaces are used by tenants, so they should be viewed separately. Vacancy rates in major areas of Seoul sharply decreased during COVID-19 because many companies expanded. However, actual in-person work was limited, so utilization rates were very low. Landlords saw increased income, but companies had to continuously pay rent and management fees for unused space. During COVID-19, companies began to reconsider their space at contract expiration, focusing on space efficiency, leading some to return or downsize leased areas. This is expected to somewhat affect vacancy rates.

- Domestic companies now struggle to find office space even if they want to. How are they coping? Many are remodeling offices?is this a viable solution?

▲ Choi: Due to supply-demand imbalance in commercial offices, tenants face increasing difficulty securing office space. New supply has sharply declined, making expansion or additional space acquisition difficult. Recent office expansions or relocations show increased adoption of flexible seating (removing personal desks to expand shared workspaces) and active use of remote work compared to pre-COVID-19. Also, companies preparing for the post-COVID era secured large office spaces but, considering employees' experience with remote work efficiency, more companies are selectively operating remote work two to three days a week. Ultimately, companies are increasingly compensating for insufficient office space through space reconfiguration and changes in work styles.

Choi Yong-jun, Executive Director at Cushman & Wakefield Korea (Photo by Cushman Korea)

▲ Executive Director Lee (hereafter Lee): Companies are concretely building future business plans, assessing employee numbers and work styles to determine whether office expansion is necessary or if demand can be met by reconfiguring existing office space. Based on data, they are either reconstructing or expanding current offices. Space changes are one of the coping strategies.

Practically, it will be difficult to secure office lease space until the year after next. For growing companies, since it is hard to find office space, they start by examining whether current office space is being used efficiently. With advances in IT technology, companies consider how many days employees need to come to the office to maintain business without major issues while maximizing efficiency. For example, if the current staff of 1,000 increases to 1,300, they assess whether the existing office can accommodate them based on work patterns. Leasing additional space incurs costs, which over a five-year period can be substantial. That cost is invested in network infrastructure, employee welfare, and better furniture to improve convenience.

The concept now is not just remote work but 'anywhere to work.' Forward-thinking companies recognize mobility as the most important factor in future office environments and invest in security, networks, and software accordingly.

- The meaning of office space seems to have changed significantly after experiencing COVID-19. Now that the three-year pandemic period is effectively over, what significance do Korean companies assign to office spaces?

▲ Lee: Previously, companies focused simply on configuring offices as places to work, but now they pay more attention to the experiences employees have in office spaces. They expand facilities and area per employee and create comfortable environments with rest areas and good interior design to help employees concentrate. The goal is for employees to feel the company's consideration and be guided to work efficiently.

Lee Jae-hong, Executive Director at Cushman & Wakefield Korea (Photo by Cushman Korea)

- What aspects do domestic companies emphasize in changing office spaces?

▲ Lee: They request spaces where 'collaboration' can occur freely. Traditionally, many companies had work structures where communication was mainly between employees and team leaders or between team leaders and executives rather than among employees, and office spaces were designed accordingly. However, as businesses diversify and project-based work increases, workforce composition becomes more varied, and communication among employees and with external parties has increased. Office spaces are being reconfigured to accommodate various forms of collaboration. One domestic pharmaceutical company eliminated executive offices and converted that space into collaboration and meeting areas. Although the office space was reduced by about two-thirds, overall office utilization increased, and employee satisfaction with office space rose from 45% to over 85%. Collaboration is actively happening in various spaces as initially planned.

- How can such office environments be created?

▲ Lee: First, work patterns must be analyzed. For example, in a game company, while it may seem all employees collaborate frequently, only certain departments like planning do so extensively. Developers, working 10 hours a day, spend 9 hours on individual tasks like programming or coding. When clients ask to design offices like Microsoft (MS), I respond that 'most such attempts fail.' Even within IT companies, work patterns vary by business area, so analysis is essential.

- Recently, conflicts have arisen domestically due to reductions in remote work. What is your view on this?

▲ Lee: Remote work is efficient for assigned tasks or individual work. However, synergies, ideas, and a sense of belonging that arise from casual conversations in the office are still difficult to replicate digitally. This is why IT and platform companies are increasingly promoting a return to office spaces. The debate over remote work versus office return should not be ideological but based on analysis and consensus about what actually improves work efficiency. If companies promote office return, they need to design various work and rest facilities so employees feel coming to the office is more convenient, helps concentration, and better supports work-life balance.

- Is the emergence of Generation Z actually influencing changes in office spaces?

▲ Lee: The direct impact of Generation Z on office spaces is still limited. However, digital communication is increasing, and not only millennials but also Generation X are adapting, so digital communication methods are expected to expand gradually.