[Global] Remote working could wipe $800 billion from office values

According to a new report, remote work risks wiping $800 billion from the value of office buildings in major cities worldwide by 2030 as the post-pandemic work trend increases office vacancy rates and drives down rents, CNN reports.

In a report released on July 13, McKinsey Global Institute said that office attendance has stabilised at 30 per cent below pre-pandemic norms and only 37 per cent of workers are going into the office every day.

The research is the latest in a series of indications that lasting changes to working habits prompted by the pandemic are impacting the value of commercial real estate. A market already under strain from rising interest rates. 

In June, HSBC reportedly announced plans to halve the size of its global headquarters, giving up its distinctive tower in London’s Canary Wharf business district in favour of a much smaller building close to the city centre.

“Hybrid work is here to stay,” the McKinsey report said. “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.”

In its research, McKinsey looked most closely at nine “superstar” cities with a disproportionate share of the world’s urban gross domestic product: Beijing, Houston, London, New York, Paris, Munich, San Francisco, Shanghai and Tokyo.

The estimated $800 billion in valuation losses across those cities represents a 26 per cent decline from 2019 levels. Under graver circumstances, the consultancy said the value of office space could fall by as much as 42 per cent.

“The impact on value could be even stronger if rising interest rates compound it,” McKinsey said. “Similarly, the impact could be stronger if troubled financial institutions decide to more quickly reduce the price of property they finance or own.”

Fears have reportedly been expressed that a downturn in commercial real estate could cause losses at banks, which finance many of the industry’s deals. In the US, where lending comes primarily from small and mid-sized banks, credit conditions have already tightened.

Falling demand for office space has in turn driven down landlords’ asking rents and McKinsey found that US cities are suffering the sharpest falls. In San Francisco and New York in 2022, asking rents fell 28 per cent and 22 per cent respectively compared with 2019, once inflation is taken into account.

In a moderate scenario, the consultancy said demand for office space could be 13 per cent lower by the end of the decade than it was in 2019.

The rate at which people are moving out of cities has returned to its lower pre-pandemic trend, however, “few of the people who left will return” and “urban shopping will not fully recover,” the consultancy said. And foot traffic near stores in urban areas reportedly remains 10-20 per cent lower than pre-pandemic; a phenomenon partly driven by online shopping growth.

McKinsey suggested that cities could adapt to the declining demand for office space by “taking a hybrid approach themselves”; developing multi-use office and retail space and constructing buildings easily adapted to serve different purposes.

In a June interview at Bloomberg’s Technology Summit, San Francisco Mayor London Breed proposed remaking the struggling city’s downtown by demolishing abandoned retail space, including Westfield Mall. The mayor suggested that a lab or soccer stadium could be built in its place.

Source: CNN

(Links and quotes via original reporting)

According to a new report, remote work risks wiping $800 billion from the value of office buildings in major cities worldwide by 2030 as the post-pandemic work trend increases office vacancy rates and drives down rents, CNN reports.

In a report released on July 13, McKinsey Global Institute said that office attendance has stabilised at 30 per cent below pre-pandemic norms and only 37 per cent of workers are going into the office every day.

The research is the latest in a series of indications that lasting changes to working habits prompted by the pandemic are impacting the value of commercial real estate. A market already under strain from rising interest rates. 

In June, HSBC reportedly announced plans to halve the size of its global headquarters, giving up its distinctive tower in London’s Canary Wharf business district in favour of a much smaller building close to the city centre.

“Hybrid work is here to stay,” the McKinsey report said. “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.”

In its research, McKinsey looked most closely at nine “superstar” cities with a disproportionate share of the world’s urban gross domestic product: Beijing, Houston, London, New York, Paris, Munich, San Francisco, Shanghai and Tokyo.

The estimated $800 billion in valuation losses across those cities represents a 26 per cent decline from 2019 levels. Under graver circumstances, the consultancy said the value of office space could fall by as much as 42 per cent.

“The impact on value could be even stronger if rising interest rates compound it,” McKinsey said. “Similarly, the impact could be stronger if troubled financial institutions decide to more quickly reduce the price of property they finance or own.”

Fears have reportedly been expressed that a downturn in commercial real estate could cause losses at banks, which finance many of the industry’s deals. In the US, where lending comes primarily from small and mid-sized banks, credit conditions have already tightened.

Falling demand for office space has in turn driven down landlords’ asking rents and McKinsey found that US cities are suffering the sharpest falls. In San Francisco and New York in 2022, asking rents fell 28 per cent and 22 per cent respectively compared with 2019, once inflation is taken into account.

In a moderate scenario, the consultancy said demand for office space could be 13 per cent lower by the end of the decade than it was in 2019.

The rate at which people are moving out of cities has returned to its lower pre-pandemic trend, however, “few of the people who left will return” and “urban shopping will not fully recover,” the consultancy said. And foot traffic near stores in urban areas reportedly remains 10-20 per cent lower than pre-pandemic; a phenomenon partly driven by online shopping growth.

McKinsey suggested that cities could adapt to the declining demand for office space by “taking a hybrid approach themselves”; developing multi-use office and retail space and constructing buildings easily adapted to serve different purposes.

In a June interview at Bloomberg’s Technology Summit, San Francisco Mayor London Breed proposed remaking the struggling city’s downtown by demolishing abandoned retail space, including Westfield Mall. The mayor suggested that a lab or soccer stadium could be built in its place.

Source: CNN

(Links and quotes via original reporting)