Report states that global cities continue to see a 30% reduction in office turnout compared to 2019
With more businesses adopting the hybrid work model, office spaces aren’t expected to bounce back to pre-Covid-19 usage rates, McKinsey predicts. This lasting shift could lead to a significant blow to office real estate market, potentially reducing the valuation of office buildings in key urban hubs by US$800 billion by 2030.
McKinsey’s research explored real estate trends in several global cities, predicting future demand till 2030. In a scenario considered moderate, the demand for office spaces in 2030 could be 13% less than what it was before the pandemic hit. Such a decrease in demand would lead to a drop of US$800 billion in the total value of office real estate in these cities.
“The cumulative worth of office spaces could fall by 26% between 2019 and 2030 in our moderate scenario, and even as much as 42% in the severe one,” the study pointed out.
“If interest rates go up, the fall in value could be more significant. Likewise, the devaluation could be more intense if financial institutions under duress decide to reduce the property prices they finance or own at a quicker pace.”
Post-pandemic recovery has seen office attendance in significant cities bounce back from a devastating 90% drop. However, it’s still down by 30% compared to the 2019 levels, according to McKinsey.
A dwindling demand, McKinsey explains, will set off a “migration towards quality” in office real estate, leaving an excess of outdated, substandard buildings that are not ready for hybrid work models and are less likely to attract employees back.
“Now that the need for office space has shrunk due to the hybrid work model, employers can afford to invest in smaller, higher-quality spaces instead of larger, substandard ones,” the report explained.
The shift in office work dynamics has also prompted employers to negotiate shorter leases. This trend may pose challenges for property owners seeking finance, according to McKinsey, and might force banks to reassess valuation models considering lease duration.
The fall in office usage is also expected to impact the retail sector. Foot traffic near stores in metropolitan areas remains 10-20% lower than before the pandemic, the report notes, forecasting a median 9% decrease in demand for retail space.
The report suggests that cities can cope by advocating for mixed-use neighborhoods and converting unused office spaces for diverse uses. Developers, too, should consider creating buildings suitable for multiple uses, dubbed “neutral-use” buildings.
While the report centered on nine major cities — Beijing, Houston, London, New York, Paris, Munich, San Francisco, Shanghai, and Tokyo — it’s worth noting that Canada’s national office vacancy rate escalated to its highest since 1994 in the second quarter. Commercial real estate firm CBRE attributed the rise to high interest rates, recession threats, and “continued uncertainty around remote work.”