According to a recent study by consulting firm McKinsey, the trend towards hybrid and remote work since the pandemic may lead to a decline of $800 billion in office property values by the end of the decade. The study, published on July 13, examined nine major cities including Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai, and Tokyo. These cities are considered “superstar” cities with a significant share of the world’s urban gross domestic product (GDP) and national GDP growth.
The study modeled two scenarios – a moderate scenario and a severe scenario. In the moderate scenario, demand for office space is projected to be 13 percent lower in 2030 compared to 2019 for the median city in the study. In the severe scenario, demand falls by 38 percent in the most heavily affected city. These projections highlight the potential impact of remote work on the demand for office spaces.
The shift towards remote work began during the pandemic when millions of workers were forced to stay home due to lockdown measures. Even after the pandemic, many employees were allowed to continue working from home or adopt a hybrid work model where they split their time between the office and home. While some companies have asked their employees to return to the office full-time, this has not been enough to mitigate the financial challenges faced by commercial real estate landlords.
The study found that office attendance in the nine metropolitan areas surveyed had dropped by up to 90 percent since early 2020. Although there has been a recovery in office attendance, it remains down by about 30 percent on average. As of October 2022, office workers visited the office about 3.5 days per week. The numbers varied among cities, ranging from 3.1 days in London to 3.9 days in Beijing.
The impact of remote work has been felt particularly in urban areas. Up to 7 percent of the urban workforce have permanently moved to the suburbs in Europe, Japan, and the United States. Cities like London, Dallas, New York, San Francisco, and Boston have been the most affected. American cities have faced more significant challenges compared to European and Japanese towns, which have a greater mix of office, residential, and retail spaces.
Technological advancements in communication tools, such as Zoom, have made remote work more feasible and appealing. Employees have realized the benefits of suburban life and are less willing to commute daily into the city. This has accelerated migration away from major cities, impacting their downtown shopping districts and resulting in a decrease in foot traffic in stores.
The decline in demand for office space has led tenants to negotiate shorter leases from property owners. This trend may pose challenges for property owners to secure financing as short-term leases make it less attractive to lenders. Additionally, commercial property owners are also facing a decline in property valuations due to increased borrowing costs and high-interest rates. Troubled financial institutions may further accelerate the reduction of property values, intensifying the financial impact on property owners.
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 would allow properties to be easily converted for different uses if tenants’ preferences change. Adapting to hybrid real estate models may offer a way for investors to counter the income loss caused by the pandemic and transform cities for a more dynamic and prosperous future.
In conclusion, the McKinsey study highlights the potential long-term impact of remote work on office property values. The shift towards hybrid and remote work has led to a decrease in demand for office spaces, contributing to a decline in property values. Urban areas are particularly affected, with a decrease in foot traffic and an exodus of the urban workforce to the suburbs. To adapt to these changing dynamics, developers and landlords should consider mixed-use development and flexible spaces. This could potentially mitigate the financial challenges faced by property owners and pave the way for a more dynamic urban landscape.
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