Worst Case Scenario: Hybrid Work Trends May Result in Office Space Demand Falling 38 Percent by 2030, Says McKinsey

Three years after the COVID-19 pandemic started, employers are struggling to bring staff back to the office after many Americans were mandated to work from home. (Andrew Caballero-Reynolds/AFP via Getty Images)

A trend towards hybrid and remote work since the pandemic may cut $800 billion from office property values by the end of the decade, according to a recent study by consulting firm McKinsey.

McKinsey said that employees continued to spend far less time working at the office compared to the pre-pandemic era,

The survey, published on July 13, reviewed nine major metropolises, Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai, and Tokyo.

The so-called “superstar” cities are regions with a disproportionate share of the world’s urban gross domestic product (GDP) and national GDP growth.

“In a moderate scenario that we modeled, demand for office space is 13 percent lower in 2030 than it was in 2019 for the median city in our study. In a severe scenario, demand falls by 38 percent in the most heavily affected city,” McKinsey said.

The McKinsey report comes at a time when the global economy is being shaken by elevated inflation, energy shortages, war in Ukraine, high-interest rates, and looming recession fears.

Changing the Urban Landscape

Vast amounts of office space have lain empty since the pandemic first swept the globe in 2020 after millions of workers were forced to stay home due to lockdown mandates worldwide.

Even after the end of the pandemic, many employees were allowed to continue working from home or part-time in the office via a new hybrid work system.

Although some firms have ordered their workers to return to the office full-time, it has not been enough to end the financial bleeding felt by commercial real estate landlords, who were caught holding the bag with major acquisitions of high-end office space.

The Canary Wharf business district on the Isle of Dogs, as seen in London, England, on June 22, 2023. (Dan Kitwood/Getty Images)

McKinsey noted that office attendance in the nine metropolitan areas had dropped by up to 90 percent since early 2020.

“It has since recovered substantially but remains down by about 30 percent, on average. As of October 2022, office workers visited the office about 3.5 days per week. That number varied among cities, from 3.1 days in London to 3.9 in Beijing,” said the report.

In the aftermath of the pandemic, many commercial tenants have reduced their office costs, while several firms have decided to permanently switch to a hybrid work model and allow them to dispense with thousands of square feet of expensive office space.

Urban Areas Suffer

The survey noted that up to 7 percent of the urban workforce left for good in the suburbs of Europe, Japan, and the United States.

London, Dallas, New York, San Francisco, and Boston were the most affected.

American cities were more affected than European and Japanese towns, which tend to have more mixed-use development, with office, residential, and retail spaces existing side by side.

In Beijing, trends were primarily shaped by pre-pandemic efforts by the authorities to control the urban population size by encouraging out-migration efforts, which were paused during the pandemic.

The absence of professional workers has left downtown shopping districts, especially in urban cores, depressed, despite an increase in foot traffic in recent months.

However, pedestrian volume in stores is still 10 to 20 percent lower than it was before the pandemic.

People walk past a Target store in New York City on June 6, 2023. (Samira Bouaou/The Epoch Times)

Technological communications improvements have also made remote working far easier.

Software like Zoom and other devices have accelerated migration away from the major cities, as work-from-home models proved workable over the past three years, and employees have an increasing appreciation for suburban life, along with a reluctance by workers to commute daily into town.

“The decline in demand has prompted tenants... to negotiate shorter leases from owners,” said McKinsey, adding that short-term leases might make it more difficult for property owners to secure financing.

Hybrid Real Estate Model

Along with rising vacancy rates, commercial property owners are dealing with a worldwide plunge in the valuation of their properties, due to a surge in borrowing costs, amid high-interest rates, forcing investors to pull their money out of office space properties.

The financial impact could be stronger if troubled financial institutions decided to accelerate the reduction of the value of property they finance or own, said the survey.

Meanwhile, McKinsey said developers and landlords could adapt by considering mixed-use development at the neighborhood level while constructing adaptable and flexible spaces at the building and floor levels.

The new model could also allow properties to be easily converted for a different use if tenants’ preferences suddenly changed.

This could protect owners from shifts in preferences that are impossible to predict while appealing to a trend toward shorter office leases.

The report said that hybrid real estate models may be a way for investors to counter the loss of income wrought by the pandemic and transform cities for a more dynamic and prosperous future.

Reuters contributed to this report.