Demand for urban real estate will be challenged for the rest of the decade. Here’s how the world’s superstar cities are projected to fare
Many thinkers today declare, like bearded bearers in cartoons, that the end is near, at least for the big cities. During the pandemic, the argument goes, residents and businesses have fled cities, starting an “urban cycle of doom” in which declining property tax revenues make cities less livable — causing more residents and businesses to flee. The end result, they predicted, would be the death of urban estates.
Is the saying of the resurrection accurate? We decided to find out by building a Detailed model that forecasts future demand for office, residential, and retail space in “supercities” (roughly, those with a disproportionate share of urban GDP and world GDP growth) in the United States, United Kingdom, Europe, and Asia. We considered important factors not usually incorporated into predictions of doom, including long-term population trends, employment, employment mix trends, immigration, office attendance patterns, shopping trends, city-specific elements (such as physical structure and home price gradients), as well as information from a large global survey we conducted.
The good news is that the most bleak outlook is very grim. The bad news is that urban real estate is already facing a significant drop in demand. Stakeholders—landlords, tenants, cities, investors, and banks—need to adapt, and they need to do so now. With the fog rising, leaving things outside and hoping to recover is not an option.
$800 billion of office space in just nine cities could become obsolete by 2030
The main reason behind the expected drop in demand is remote and hybrid work, of course, which has become widespread during the pandemic. Plenty of evidence suggests that hybrid work is here to stay. As of fall 2022, workers were going to the office an average of only 3.5 days a week, according to our survey. Answers from the same survey indicate that office attendance has nearly reached balance.
The shift to remote and hybrid work has led to two additional shifts in people’s behaviour. First, many residents, unfettered from their desks and therefore less afraid of long commutes, have moved away from urban centres. The metropolitan center of New York City (i.e. the 12 most densely populated counties in the metropolitan area) lost 5% of its population from mid-2020 to mid-2022. The urban center of San Francisco (San Francisco County, Alameda County, and San Mateo County) lost 6%.
Secondly, consumers are starting to shop less in traditional stores – and far Less in shops in urban centres, where people are now less likely to work or live. Foot traffic near stores in urban areas is still 10-20% lower than pre-pandemic levels, but the differences between restoring urban and suburban traffic are significant. For example, in late 2022, foot traffic near suburban stores in New York was 16% lower than it was in January 2020, while foot traffic near downtown stores was 36% lower.
With fewer employees working in the office, the demand for office space will decrease. By 2030, that demand will be 20% lower, depending on the city — even in a moderate scenario where office attendance rises but remains lower than it was before the pandemic.
And as fewer consumers shop in brick-and-mortar stores, so will the demand for retail space, according to our model. In metropolitan London, the worst affected city, demand for retail space will be 22% lower in 2030 than it was in 2019 in a moderate scenario.
According to our model, the demand for residential space will decrease. In most super cities, this demand will be higher in 2030 than it was in 2019 — but lower than it would have been without the pandemic. Lower demand is likely to constrain price and rent growth, at least in part. From the end of 2019 to 2022, prices rose eight percentage points less quickly in the urban centers of super cities than in their suburbs. But this will not be enough to make housing in super-cities affordable.
The reduced demand will have significant impacts on stakeholders in urban areas. For example, in just nine cities that we studied particularly closely, $800 billion in office space could become obsolete by 2030. And the complexities of the overall economy could become It gets worse. Rising interest rates followed by a severe recession could lower US real estate prices by 30% by 2030, for example. Established high inflation can eat away at 20% of a property’s value.
way forward
Right now, parts of the industry are dealing with these issues by ignoring them. Some banks extend the term of existing mortgages rather than restructuring the loans or reducing their value to the diminishing value of the collateral. Valuers struggle to properly value value because there is so much uncertainty, and using recent transactions as a basis is problematic when markets are frozen to a standstill. Some landlords are leasing empty space for temporary uses, such as pop-up shops, in hopes of recovering as vacancy decreases and long-term rents rise in the future.
Ignoring problems gets in the way of solving them. Instead, the real estate industry should take the bull by the horns and start redeveloping older spaces. May go further and reimagine itself as a solutions provider – one that partners with customers to make hybrid work a competitive advantage and determine its impact. After all, real estate companies, with many tenants on many properties, are likely to recognize patterns that not every single tenant will recognize. For example, real estate companies can find ways to improve the employee experience, making days in the office more enjoyable and productive. They can measure how engaged the employees who come into the office are, and how likely those employees are to stay with the company. Real estate companies can offer clients insight into when workers should come into the office and when they don’t need to. Companies may need to rethink the way they offer leases, offering flexibility to tenants who don’t even know how much space they’ll need in 12 months, let alone five years.
Policymakers also have opportunities for reflection. For years, super cities have suffered from a dearth of space and crowded public transportation. Now that these problems have suddenly receded, those concerned with the welfare of cities must ask themselves: How can we make use of all this space? Encouraging mixed-use development, where neighborhoods accommodate a diverse mix of office, residential, and retail space, is a particularly promising avenue because our research shows such neighborhoods have withstood the pandemic better than overcrowded neighborhoods. Governments can begin to reform restrictive zoning policies.
The solutions will not be easy. But it’s not impossible – and now it’s time to get to know it and start working on it.
Jan Mischke is a partner at the McKinsey Global Institute. Olivia White is a Senior Partner at McKinsey and Director of the McKinsey Global Institute. Aditya Sanghvi is a Principal Partner and Leader of the McKinsey Real Estate Initiative. They are the co-authors of Empty spaces and mixed spaces: The enduring impact of the pandemic on real estate.
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