Concerns are growing in the commercial real estate market as the U.S. Federal Reserve (Fed) is anticipated to execute a "big step"—a 0.5 percentage point rate hike—next month, amplifying market uncertainty.

When interest rates rise, borrowing costs increase, and required rates of return climb, driving down the asset prices potential buyers can afford. Consequently, both parties are forced to renegotiate pricing, frequently leading to delayed or even aborted transactions.

Delayed Deal Closings: Anam Tower, Suseo Rosedale, and More

According to the financial investment industry on the 14th, the commercial real estate sector is seeing a buildup of office properties that have failed to achieve deal closing for years. Instances of halted office transactions resuming sales procedures or replacing advisory firms to seek new buyers are on the rise.

A representative example is Anam Tower, located around 702-10 Yeoksam-dong, Gangnam-gu, Seoul. Situated near Seolleung Station (Subway Line 2), Anam Tower is a large building with 6 underground floors, 20 above-ground floors, and a total floor area of 44,037.78 square meters (approx. 13,335 pyeong).

Owned by Hanwha Asset Management, the asset was put up for sale in 2023. At the time, NH REITs Management pursued an acquisition at around 35.97 million won per 3.3 square meters, but the deal fell through. With market conditions shifting, Capstone Asset Management has recently been selected as the preferred bidder, restarting the sale process.

Suseo Rosedale has also undergone multiple sales processes. Located at 280 Gwangpyeong-ro, Gangnam-gu, Seoul (724 Suseo-dong), Suseo Rosedale is a massive mixed-use business complex spanning 8 underground floors, 20 above-ground floors, and a total floor area of 97,526 square meters (approx. 29,501 pyeong).

The lower floors (B1 to 10th floor) comprise large-scale offices, while the upper floors consist of officetels. The sale targets the office portion spanning B1 to 10th floors, covering roughly 55,462 square meters (approx. 16,777 pyeong).

Owned by Intrust Investment Management, the asset was pushed for sale in 2022 and 2024, though the 2022 procedure was canceled during the advisor selection stage. Sales resumed later, and Stick Alternative Asset Management was selected as the preferred bidder at about 27 million won per 3.3 square meters in the August auction.

Widening Price Gap Between Sellers and Buyers

Development assets are also restructuring their sales strategies. Benefoss Seongsu, a development project by the developer Benefoss, attempted a pre-sale last year, but transactions did not progress smoothly. In response, the sales advisory firms were replaced from Savills and Samjong KPMG to Cushman & Wakefield (C&W), Deloitte, and NAI Korea to restart the sale.

Benefoss Seongsu is a large-scale prime office complex developed by Benefoss at 278-3 Seongsu-dong 2-ga, Seongdong-gu, Seoul. Set for completion this month, it features 6 underground floors, 18 above-ground floors, and a total floor area of 60,661.9 square meters.

Large-scale assets that previously failed to secure any transactions are also reappearing on the market. Yeongdeungpo Times Square Office Buildings A and B, owned by Koramco Asset Trust, received zero bidders during their 2024 sale attempt, causing the deal to collapse.

Subsequently, JR Investment Management pushed for re-acquisition by enlisting AZ Financial Services as a strategic investor (SI). AZ Financial Services is a large independent general agency (GA) providing comparison and consulting for products from dozens of life and non-life insurance companies.

Financing Costs Surge as Rate Hike Fears Mount

Amid this environment, the prospect of a Fed "big step" is heightening market uncertainty. As market rates—such as domestic Korean Treasury yields—climb in the wake of the Fed's rate hikes, senior collateralized loan rates applied to actual office transactions are following an upward trend.

For real estate buyers, a roughly 1 percentage point increase in loan interest rates carries implications far beyond a mere rise in financial expenses. Higher borrowing costs translate to lower investment yields, which in turn reduces the price a buyer can comfortably afford.

This creates a widening chasm between the price desired by sellers and the funding procurable by buyers. Even if sellers and buyers finish pricing negotiations and select a preferred bidder, worsening financing conditions can cause deals to stall or fall through entirely.

Given that senior mortgage loan rates have risen past the 5% threshold compared to the 3% range late last year, enforcing past pricing is exceedingly difficult. This dynamic fosters a standoff where sellers strive to maintain prices, while buyers attempt to lower them to reflect inflated financing costs.

"If the likelihood of a U.S. Fed rate hike increases, potential buyers face higher required rates of return, making deal execution difficult in many cases," a commercial real estate industry insider noted. "To satisfy equity investors' elevated return expectations, sale prices must come down, often forcing sellers and buyers back to the negotiating table."

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