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Office work isn’t likely to return to levels seen before the Covid-19 pandemic, a permanent shift that could knock US$800 billion from office building values in major cities by 2030, a report from McKinsey says.

The consulting firm examined real estate markets in several global cities and modelled demand scenarios to the end of this decade. In its moderate scenario, demand for office space would be 13% lower in 2030 than before the pandemic. Falling demand would drive down value in those nine major cities by US$800 billion, it said.

“On average, the total value of office space declines by 26% from 2019 to 2030 in the moderate scenario and by 42% in the severe one,” the report said.

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

While office attendance in major global cities has recovered after dropping by as much as 90% during the pandemic, it’s still 30% lower than in 2019, McKinsey said.

Falling demand will lead to a “flight to quality” for office space, it said, resulting in a surplus of lower-quality and older buildings that aren’t suited to hybrid work or are less likely to lure workers back to the office.

“Also, now that hybrid work has reduced the total amount of space that employers need, they can spend their budgets on smaller amounts of higher-quality space rather than larger amounts of lower-quality space,” the report said.

Uncertainty around office work has also led employers to negotiate shorter leases. This may make it more difficult for owners to obtain financing, McKinsey said, or lead banks to adjust valuation models that consider lease duration.

Declining office use will have a knock-on effect on the retail sector. Foot traffic near stores in metropolitan areas is still 10–20% lower than before the pandemic, the report said, and it forecasts a median decline of 9% in demand for retail space.

McKinsey said cities can adapt by encouraging mix-used neighbourhoods and converting some vacant office space for other uses. Developers should also consider hybrid buildings or “neutral-use” buildings that can be modified for different uses, the report said.

While the study’s nine focus cities — Beijing, Houston, London, New York, Paris, Munich, San Francisco, Shanghai and Tokyo — didn’t include any in Canada, the national office vacancy rate in Canada climbed in the second quarter to its highest level since 1994. Commercial real estate firm CBRE cited high interest rates, the threat of a recession and “continued uncertainty around remote work” among the contributing factors.