McKinsey’s message to the world’s largest cities is clear: Adapt or face extinction. According to a recent study conducted by the McKinsey Global Institute, hybrid work is here to stay, suburbs are flourishing, and the demand for retail and office space in urban centers could plummet by almost 40 percent from 2019 levels within a few years. To remain viable to employees, global cities must embrace the concept of multi-use buildings and mixed-use neighborhoods.
The study, which involved more than a year of extensive research and surveyed over 12,000 employees and consumers across nine major global cities, including New York, San Francisco, Paris, London, Houston, Munich, Tokyo, Beijing, and Shanghai, aimed to comprehend the real-world impact of hybrid work on a global scale. It sought to determine the future of work in light of changing behaviors and how these changes would influence the demand for commercial real estate in urban centers worldwide.
Brian Vickery and Jan Mischke, two of the nine authors of the McKinsey report titled “Empty Spaces and Hybrid Places: The Pandemic’s Lasting Impact on Real Estate,” stressed in an interview with Commercial Observer that hybrid work has become a permanent fixture of the global economy and will continue to be so in the foreseeable future. The report’s findings indicated that employees, on average, are working 3.5 days per week remotely, but they expressed a desire to reduce that frequency slightly. They also anticipate that their employers will expect them to increase their in-office presence in the future.
The survey revealed that office attendance in the nine major cities has dropped by 30 percent compared to pre-pandemic levels and is unlikely to surpass the 2019 figures, as even senior employees are embracing hybrid work models. Notably, a significant portion of the surveyed individuals, approximately 10 to 20 percent, claimed they would seek alternative employment if their current employers demanded more in-person office work. Interestingly, this sentiment was particularly prevalent among higher-income individuals, executives, and senior professionals. Essentially, those employees that employers would be least inclined to lose were the ones expressing their intent to leave their jobs if required to work more from the office.
This shift away from traditional work settings has correspondingly led to a rise in suburban living. The research indicated that between mid-2020 and mid-2022, between 5 and 7 percent of residents in the surveyed global urban cores permanently relocated to the suburbs. The report highlighted that the urban cores most impacted were those characterized by expensive homes, high office density, a greater concentration of knowledge-based workers, and limited retail presence. In general, urban cores in the United States experienced more significant effects than their European and Japanese counterparts, which tend to have a more balanced mix of office, residential, and retail spaces.
The authors of the report emphasized that the data on suburban growth aligns with the sentiments expressed by the respondents. Contrary to earlier notions that people would eventually return to cities after the pandemic, the survey results indicated that individuals do not plan to go back to their previous locations. They are willing to accept longer commute times because they have to visit the office less frequently.
As a result of reduced office attendance, suburban migration, and decreased retail footfall, the demand for commercial real estate assets in the core areas of these major cities is expected to decline. The authors predict a significant and sustained impact on demand, with outcomes varying depending on the city and neighborhood. The areas most affected are those with knowledge-intensive firms, high housing prices, dense office and commuter populations, challenging commutes, and monocultural environments.
Downtown office spaces have been hit the hardest by the migration to suburbs and the decrease in daily attendance. Between 2019 and 2022, office transaction volume in New York, San Francisco, and Houston dropped by 57 percent, average sales prices per square foot decreased by 20 percent, and asking rents fell by nearly 22 percent, according to McKinsey’s data. San Francisco experienced an astounding 79 percent decline in transaction volume in 2022 compared to 2019. In a more pessimistic forecast, the report predicts that global office demand by 2030 could be nearly 40 percent lower than the 2019 levels, potentially putting $800 billion worth of office assets at risk.
The data models also project a 10 percent decrease in demand for multifamily residences and a 9 percent decline in retail space demand in the nine surveyed global urban areas by 2030 compared to 2019 levels.
If there is any silver lining to this potential downfall in the commercial real estate industry, it lies in innovation and reinvention. The report underscores the need for cities to prioritize the development of mixed-use spaces, including neighborhoods that incorporate office, residential, and retail buildings. Additionally, future office spaces must be designed to be adaptable and flexible, catering to the requirements of hybrid work. The authors expect a rise in mixed-use developments and the repurposing of outdated office buildings to align with the evolving market demands.
Above all, the report emphasizes that the commercial real estate landscape of a few years ago no longer exists. The traditional long-term leases of 10 to 15 years are no longer viable. Employers now face the challenge of understanding their space needs not just in a decade but even in the next few years. The amount and type of space required have become more complex considerations for businesses.