A recent study by consulting firm McKinsey suggests that the increasing trend towards hybrid and remote work since the pandemic could lead to a reduction of $800 billion in office property values by the end of the decade. The study, published on July 13, reviewed nine major metropolises, including Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai, and Tokyo. These cities are considered “superstar” cities due to their disproportionate share of the world’s urban gross domestic product (GDP) and national GDP growth.
According to McKinsey, in a moderate scenario that was modeled, the demand for office space will be 13 percent lower in 2030 compared to 2019 for the median city in the study. In a severe scenario, this demand could fall by as much as 38 percent in the most heavily affected city. These projections come at a time when the global economy is facing challenges such as elevated inflation, energy shortages, the war in Ukraine, high-interest rates, and looming recession fears.
The pandemic has significantly impacted office spaces, with vast amounts of office space remaining empty since 2020 when workers were forced to stay at home due to lockdown mandates worldwide. Even after the pandemic, many employees have been allowed to continue working from home or adopting a hybrid work system, which allows them to work part-time in the office. While some companies have mandated a full-time return to the office, this has not been enough to stop the financial losses experienced by commercial real estate landlords.
McKinsey’s report highlights that office attendance in the nine metropolitan areas under review had dropped by up to 90 percent since early 2020. Although there has been some recovery, with attendance currently down by about 30 percent on average, the number of office visits per week varied among cities, ranging from 3.1 days in London to 3.9 days in Beijing as of October 2022. Many commercial tenants have reduced their office costs, while some companies have permanently adopted hybrid work models and decreased their office space requirements.
The impact of these changes has been felt in urban areas. Up to 7 percent of the urban workforce have left for the suburbs of Europe, Japan, and the United States, with cities like London, Dallas, New York, San Francisco, and Boston being the most affected. European and Japanese towns have been less affected compared to American cities, as they have more mixed-use development with office, residential, and retail spaces existing side by side.
Technological advancements and improved communication tools have also made remote working more feasible and appealing. Software like Zoom and other devices have accelerated the migration away from major cities, as work-from-home models have proven successful over the past three years. Employees have developed an increased appreciation for suburban life and are less willing to commute daily into the city.
The decline in demand for office space has led tenants to negotiate shorter leases with property owners, making it more challenging for owners to secure financing. Additionally, commercial property owners are facing a worldwide decline in property valuations due to rising borrowing costs and high-interest rates, resulting in investors pulling their money out of office space properties. Troubled financial institutions may further accelerate the reduction of property values they finance or own, intensifying the financial impact.
To adapt to these changing circumstances, McKinsey suggests that developers and landlords should consider mixed-use development at the neighborhood level and construct adaptable and flexible spaces at the building and floor levels. This approach would allow properties to be easily converted for different uses if tenants’ preferences change suddenly. It also aligns with the trend towards shorter office leases and offers a way for investors to counter the income loss caused by the pandemic. By embracing hybrid real estate models, cities can transform for a more dynamic and prosperous future.
In conclusion, McKinsey’s study highlights the significant impact of the trend towards hybrid and remote work on office property values. The ongoing shift in work preferences due to the pandemic, coupled with other economic challenges, has led to decreased demand for office space and financial losses for commercial real estate landlords. To navigate these changes, developers and landlords should explore mixed-use development and create adaptable spaces. This may provide a way for investors to recover from the pandemic’s consequences and contribute to the transformation of cities for a thriving future.