In the last article, we looked at the generation storage, which has been spotlighted as a must-have option in the recent apartment allocation market. Although it is the only means to expand living space, there is a risk of safety accidents. So, I mentioned that a specialized operational management institution with expertise and technology, like a mini-storage attic, is necessary. In this article, we will explore what role self-storage can play in solving the vacant space issues of knowledge industry centers, which have recently emerged as a social issue.

Vacancy Issues of Knowledge Industry Centers Emerging as a Social Problem

< Serious vacancy issues in knowledge industry centers / Source: Kyunghyang Shinmun >

Knowledge industry centers refer to structures that were previously known as 'apartment-type factories' and are office spaces of three or more floors where small and medium-sized enterprises or startups related to knowledge industries can reside. Since the 2010s, when South Korea's industry shifted from manufacturing to knowledge industries like IT and research and development, they have rapidly expanded with the active support of the government. According to the Korea Industrial Complex Corporation, as of May this year, there are about 1,500 knowledge industry centers nationwide, of which about 73% are concentrated in Seoul and Gyeonggi Province.

< Number of new knowledge industry center approvals nationwide (2005-2020) / Source: Korea Industrial Complex Corporation >

Knowledge industry centers have caught attention as income-generating real estate, apart from their original purpose. Following the rise of housing prices and low interest rates in the late 2010s, as housing regulations were tightened, real estate investors began to take an interest in knowledge industry centers, which were relatively free from regulations. They were able to avoid various real estate restrictions such as resale limits, and loans were available up to 80% of the selling price. Moreover, unlike general factories, they weren't subject to the 'factory total quantitative system', resulting in their rapid emergence across the nation.

< News articles on vacancies in knowledge industry centers / Source: JTBC >

However, recently the vacancy problem of knowledge industry centers has emerged as a serious social issue. In most areas outside of the popular regions in the metropolitan area, the vacancy rate exceeds half, and in some oversupplied regions, it is reported that the vacancy rate has reached as high as 90%. Until the late 2010s, when startups thrived, knowledge industry centers were regarded as good real estate investment options.

However, starting from the mid-2020s, demand for entry began to sharply decline due to rising interest rates and economic recession, while new supplies did not decrease, ultimately leading to vacancy issues due to oversupply.

As a result, there is a chilling wind blowing in the knowledge industry center sales market. The number of transactions, which peaked at 2,158 in 2021, dropped drastically by nearly 63% to 802 last year, with transaction amounts also showing a significant decrease from 851.4 billion to 332.1 billion.

< Transaction scale of knowledge industry centers nationwide (2020-2023) / Source: Real Estate Planet >

The bigger problem is that the losses caused by vacancies are being fully passed on to individual investors. With prolonged vacancies and rising interest rates, cases of investors unable to bear the burden of interest are increasingly forced to put their properties up for auction.

According to auction data specialist Gigi Auction, the number of knowledge industry centers that went to auction last year was 688, a 70% increase from the previous year, and only about one in three of these found new owners. Concerns about credit risk have also been raised in the financial sector due to the rising delinquency rate of mortgage loans.

While the government recognizes the seriousness of this issue and has introduced measures to expand the industries that can occupy these spaces and prevent unrestrained supply, the real estate industry argues that there are limitations in seeing this as a fundamental solution.

Self-Storage Utilization Cases in Hong Kong Industrial Buildings

To solve this issue, we look at cases from abroad. Similar to South Korea, Hong Kong has a high population density for its small area and has industrial buildings similar to South Korea's knowledge industry centers. These buildings are multi-story industrial structures designed for manufacturing activities in the 1970s and 1980s and have played a crucial role in Hong Kong's economic development and efficient use of urban space.

However, as Hong Kong's economy transitioned from manufacturing to finance, IT, and service industries, the utilization of these buildings also changed. While they are sometimes used as offices for startups or studios for artists, the most representative and exemplary case of conversion is into self-storage.

For example, an asset management company, Blackstone, and the self-storage company, Storefriendly, jointly purchased an industrial building in Hong Kong and converted it into a self-storage facility. They transformed underutilized factories in the city into self-storage spaces, thereby increasing profitability. In this process, they naturally met the self-storage demands of residents while relieving the concerns of landlords, and the functionality of urban buildings was reorganized, contributing to urban regeneration, resulting in a desirable outcome.

< Hong Kong Novel Industrial Building converted into a self-storage facility / Source: Storefriendly >

The new utilization of urban buildings has not only resolved Hong Kong's chronic space shortage but also created new business opportunities, generating investment returns for real estate developers and investors.

 A Win-Win Solution for Self-Storage and Knowledge Industry Centers

As seen in the Hong Kong case, South Korea's apartment-type factories, or knowledge industry centers, are also very suitable conditions for conversion to self-storage. This can be examined from three aspects: locational conditions, convenience of use, and profitability.

First, knowledge industry centers are located in areas that are suitable for operating self-storage facilities. Being facilities for work, they are conveniently located for public transportation and vehicle use, considering the commuting of resident companies. Additionally, they are large high-rise buildings generally located along major roads, making it easy for first-time customers to locate them.

Next, they have the necessary conditions for users to conveniently deposit and reclaim their goods. Since these buildings were designed with office spaces in mind, they generally have high ceilings and spacious areas, as well as sufficient parking space and elevators. They also allow vehicle access on every floor, making it easy to move goods with a short distance from the vehicle to the facility.

Lastly, utilizing knowledge industry centers as self-storage facilities can lead to stable and high profitability. Compared to surrounding commercial areas, rental and management costs are relatively lower, so the expected rate of return is relatively modest. Additionally, the buildings themselves are well equipped with heating, cooling, and security systems, which can save on investment costs. In contrast, there are many resident companies within the buildings, making it easier to secure customer demand. Therefore, while the input costs are lower compared to typical commercial spaces, the expected profitability can yield better results.

Indeed, when looking at mini-storage attic points within knowledge industry centers, they have rapidly increased their occupancy rates compared to typical commercial buildings, and the payback period is also relatively short. With clear advantages, inquiries from knowledge industry center owners looking to solve vacancy problems by utilizing attics have been steadily increasing.

< Mini-storage attic points within knowledge industry centers (Munrae Station, Bucheon Ok-gil) / Source: Mini-storage attic website >

Need for Regulatory Improvements to Expand Self-Storage Utilization

However, attention must be paid to regulations when converting knowledge industry centers into self-storage facilities. Unlike general buildings that are subject to construction law regulations, knowledge industry centers are regulated under the "Industrial Complex Activation and Factory Establishment Act" (hereinafter "Industrial Complex Act"). This act governs industrial sites and industrial complexes, including knowledge industry centers, and stipulates the requirements for establishment and the types of businesses that are allowed to occupy them.

The purposes of knowledge industry centers are broadly divided into factory facilities and support facilities. Unlike support facilities where most businesses can occupy, the "Industrial Complex Act" restricts the types of businesses that can occupy factory facilities to manufacturing, knowledge-based industries, information and communication industries, and other businesses designated by presidential decree. Only self-storage companies that have been recognized for their innovation, such as Mini-storage Attic, which was designated as the first ICT regulatory sandbox, can exceptionally occupy knowledge industry centers.

I understand that the government is working to expand the types of businesses that can occupy knowledge industry centers to resolve the vacancy problem. In this process, it would be beneficial to see self-storage businesses included as a viable alternative discussed in the domestic real estate industry to resolve the current vacancy issue.

In this article, we explored how attractive self-storage is as a solution to the vacancy problem of knowledge industry centers. In the next article, I will introduce self-storage businesses utilizing real estate development that are widely used in advanced countries like the United States and Japan and their application in South Korea.