By Ellie Harmsworth
Remote work poses a significant threat to the value of office buildings in major cities, potentially wiping out $800 billion, and highlighting the challenges that landlords face due to shifts in employment trends post-pandemic.
A report from McKinsey Global Institute reveals that the hybrid work model resulting from Covid-19 has reduced the demand for office space, leading to an increase in vacancy rates. The report models the impact on property valuations by 2030 in nine global cities.
According to the report, the estimated $800 billion valuation loss represents a 26% decline from 2019 levels, with potential for the blow to deepen up to 42%. As an example, two office buildings in Orange County were recently sold for 36% less than their purchase price.
“The impact on value could be even greater if rising interest rates compound it,” warns McKinsey. “If troubled financial institutions decide to more quickly reduce the price of property they finance or own, the bearing could increase further.”
McKinsey’s model provides insight into how property owners and lenders are grappling with the changes in workplace dynamics following the pandemic. The shift is also affecting the value of retail and residential real estate, as people’s new habits influence their shopping and living preferences.
Under moderate projections, demand for office space is expected to be 13% lower by the end of the decade, according to McKinsey. Presently, office attendance remains 30% lower than pre-pandemic levels, with only 37% of people returning to the office on a daily basis.
McKinsey also notes that foot traffic near stores in metropolitan areas still remains 10% to 20% below pre-pandemic levels.
The decrease in office attendance has resulted in declining asking rents in real terms. US cities, particularly San Francisco and New York City, have experienced sharper drops of 28% and 18% respectively. However, European centers such as Paris, London, and Munich have shown more resilience.
This trend is expected to continue as more employers downsize office space to cut costs once long-term leases expire. In Southern California, the number of empty office spaces has increased by 67% since 2019.
“Some tenants have chosen not to wait for their renewal dates and have opted to buy their way out of long-term contracts,” explains McKinsey.
McKinsey suggests that developers can adapt to the declining demand for office and retail space by creating hybrid buildings that can be easily modified to serve different purposes. These designs would protect owners from unpredictable shifts in preferences and make buildings more valuable by increasing adaptability for tenants moving in and out more frequently.
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