The commercial real estate market is expected to experience increased polarization as it concludes a period of declining interest rates and enters a phase of rising financing costs.
On July 21, R Square released its '2026 Commercial Real Estate Collateral Loan Report: The End of the Downward Trend in Interest Rates, True Asset Selection Amid Financing Challenges,' indicating that the commercial real estate market has entered a 'new phase of rising loan rates' following recent interest rate hikes.
The report noted that the downward trend in interest rates, which began in the second half of last year amid global tightening, has effectively come to an end. The Bank of Korea's interest rate hike on July 16 has intensified the pressure for increased financing costs.
According to R Square, the interest rate for prime collateral loans for offices in the Seoul and Bundang areas reached 4.03% in the second quarter of this year. The total effective financing cost, including financial institution fees, rose to 4.43%, increasing the financial burden on investors.
There is also a noticeable differentiation in loan conditions by asset type. In the first quarter of this year, the interest rate for prime collateral loans for offices was 4.04%, while logistics centers recorded 4.74%, resulting in a 70 basis point (0.70 percentage point) gap between the two asset types. This indicates that assets with stable cash flows are increasingly able to secure financing at lower rates.
Investment profitability is also under growing pressure. In the first quarter, the office cap rate (the expected return on investment) was 4.36%, narrowing the gap with the prime loan rate (4.04%) to 32 basis points. If interest rates continue to rise, there is a possibility of 'negative leverage,' where loan rates exceed asset returns.
R Square anticipates that the gap in financing conditions between high-quality and lower-quality assets in the commercial real estate market will widen further. Assets with stable rental income and cash flow are expected to maintain relatively lower rates and favorable financing conditions, while other assets may face increased financing burdens.
Choi Kyu-jeong, a researcher at R Square, stated, 'The recent interest rate hike will sustain upward pressure on rates for new and refinancing loans for the time being. It is crucial to adopt a conservative approach to pricing and proactive liquidity management, focusing on investment strategies centered around high-quality assets with stable cash flows.'
Meanwhile, the factory and warehouse investment market is seeing a recovery, particularly with logistics centers, as large transactions exceeding 100 billion won are occurring. R Square's analytics team reported that, according to data from the Ministry of Land, Infrastructure and Transport, the total transaction volume for factories and warehouses nationwide in May reached 1.142 trillion won, with 260 transactions recorded.
* This article has been translated by AI.
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