Changing work, commuting and living patterns since the pandemic are expected to further reduce demand for office space and weigh on other commercial real estate in the world’s most economically vibrant cities, according to McKinsey.

In a survey of 13,000 full-time office workers in six countries — China, France, Germany, Japan, the UK and the US — the management consulting company found that office attendance is currently 30% lower on average, compared with pre-pandemic levels. Office attendance tends to be much lower for larger firms in the knowledge economy, including in professional services, finance and management industries.

“The return to office en masse is not coming, and certainly not coming at the pace that some may perceive,” says Brian Vickery, a partner at McKinsey’s Boston office who co-authored the research. He adds that in most cities there is been a “flight to quality properties” as preferences have “changed meaningfully” towards spaces that help tenants to attract employees and coax them back the office.

Of the nine ‘superstar’ cities assessed by McKinsey (those that make up a disproportionate share of global gross domestic product), all have seen an increase in office vacancy rates between 2019 and 2022. London, which saw the second-highest jump in vacancy rates behind San Francisco, reported the lowest levels of office attendance among all the nine cities, at an average of 3.1 days per week.

The reduction in office attendance from hybrid working is leading to a change in office tenant needs and a reduction in demand for space. While there is significant variation between different cities and neighbourhoods, McKinsey expects lower office demand to be most pronounced in urban areas with dense office space, expensive housing and more knowledge economy employers. 

More reading on real estate and cities:

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San Francisco is expected to be the most severely impacted moving forward, where office demand is estimated to be 20% lower in 2030 under a relatively optimistic ‘moderate’ scenario, according to the McKinsey report published on July 13. Under a ‘severe’ pessimistic scenario, where the effects on office employment and attendance are even stronger, demand for office space in San Francisco is forecast to decline by as much as 38%.

The report also assessed how behavioural changes since the pandemic will impact demand for offices, residential and retail in the nine supercities. Similar declines in office demand are expected in New York (–16%), Munich (–16%) and Shanghai (–14%), while Houston and Beijing are both expected to see a moderate increase (+2%) in demand for offices by 2030. McKinsey noted that as workers have become untethered from offices, many have moved outside of urban cores. As this has affected their shopping habits, the change is causing profound impacts on demand for both retail and residential real estate.

The research underlines the heavy pressure being placed on commercial real estate as tenants have changed their expectations in the post-pandemic world. Higher interest rates and tighter financial conditions in 2023 have also redefined real estate markets, as buyers and sellers are reluctant to agree on pricing with lower valuations.

Jan Mischke, a Zürich-based partner at McKinsey, says it is “not all doom and gloom” due to variations in office vacancy rates across cities and neighbourhoods. But he says there are still a lot of cities, developers, real estate owners and banks playing an “extend and pretend” game, whereby they hope to see a “magic recovery” in offices and not recognise their losses.

This highlights a major concern among financiers about defaults on loans for office buildings unable to find buyers, particularly if all of these loans reach maturity at a similar time. More than $310bn worth of commercial real estate loans are set to mature in the US alone by the end of 2024, according to software company Trepp.

Juan Velayos, the managing partner of JV20, a Spain-based real estate investment and advisory firm, tells fDi that offices face a “massive” challenge over the next five to ten years, and will mark what happens with the rest of the real estate industry. 

He notes that the challenges facing offices in Europe and the US are very different due to typically longer commute times for many workers in the US compared with their European counterparts.

Despite pessimistic predictions about the future of real estate, Mr Mischke also notes that the current climate gives a unique opportunity to cities, especially those previously facing a lack of space and congestion, to convert office buildings and make neighbourhoods more mixed-use and attractive.