The days of working in the office five days a week are gone forever, and that will have an impact on the value of commercial real estate and on the overall health of large cities, a new report from the McKinsey Global Institute found.
The effects of the Covid-19 pandemic created lasting changes to working habits, hurting the commercial value of real estate. The report estimated that $800 billion in office space value is at stake by 2030 as more people work remotely at least part of the time, increasing office vacancy rates and reducing rents.
“Superstar cities” such as New York City and San Francisco suffered the most when the pandemic caused lockdowns and remote working. Office attendance fell by 90 percent in those cities, and by about 70 percent in Houston.
In San Francisco and New York last year, asking rents fell 28 percent and 22 percent respectively, compared with 2019, once inflation is taken into account, the report found. New York City’s urban core lost five percent of its population from mid-2020 to mid-2022, and San Francisco’s lost six percent, the report also found, also noting the resulting reduction in foot traffic and its effects on businesses.
The report looked at nine superstar cities, defined as those “with a disproportionate share of the world’s urban gross domestic product.” In addition to the three American cities mentioned, those cities are Beijing, London, Paris, Munich, Shanghai and Tokyo.
New York City’s in-office rate continues to hover at around 50 percent of pre-pandemic levels, Crain’s New York Business reported, which is about the national average. In addition to San Francisco, cities such as Los Angeles, Philadelphia and Washington are also experiencing high office vacancy rates.
Last month, HSBC announced plans to halve the size of its global headquarters, moving from London’s Canary Wharf business to a much smaller building close to the city center, CNN Business reported.
“Hybrid work is here to stay,” the report stated. “Urban real estate in superstar cities around the world faces substantial challenges. And those challenges could imperil the fiscal health of cities, many of which are already straining to address homelessness, transit needs, and other pressing issues.”
The report said that “[c]ities and buildings can adapt and thrive by taking hybrid approaches themselves. Priorities might include developing mixed-use neighborhoods, constructing more adaptable buildings, and designing multiuse office and retail space.”