Cities urged to adapt as hybrid work is ‘here to stay’

Hybrid work is “here to stay” and the knock-on effects for real estate and major cities are substantial, according to a new report from analyst firm McKinsey.

The McKinsey Global Institute modelled future demand for office, residential and retail space in ‘superstar cities’ – defined as those with a disproportionate share of the world’s urban GDP and GDP growth – and the report focuses most closely on nine: Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai and Tokyo.

The study, based on a survey of 13,000 workers, finds that office attendance is down by 30 percent on average compared to pre-pandemic, and that demand for office and retail space in superstar cities will remain below pre-pandemic levels. In a moderate scenario, demand for office space is expected to be 13 percent lower in 2030 than 2019, with a total value of US$800 billion at stake in the nine cities. In a severe scenario, demand could fall by as much as 38 percent.

According to McKinsey, real estate demand is likely to be lower in neighbourhoods and cities characterised by dense office space, expensive housing and large employers in the knowledge economy.

Ripple effect

“The ripple effects of hybrid work are substantial,” the report says, noting that “untethered from their offices, residents have left urban cores and shifted their shopping elsewhere.”

For example, according to the report, New York City’s urban core lost five percent of its population from mid-2020 to mid-2022, and San Francisco’s lost six percent.

“Urban vacancy rates have shot up and foot traffic near stores in metropolitan areas remains 10 to 20 percent below pre-pandemic levels,” the researchers say.

McKinsey’s modelling projects that on average, there will be nine percent less demand for retail space in 2030, compared to 2019. It does not account for potential price adjustments.

In San Francisco’s urban core, demand could be 17 percent lower based on a scenario where there is a partial return to the office, adoption of online shopping returns to its pre-pandemic rate of growth, and people who moved during the pandemic do not return. In a more severe scenario, the decline in demand could be as high as 42 percent.

The analysis also considers other factors impacting real estate in cities such as long-term trends in population, employment and automation, and shopping and the growth of e-commerce.

Hybrid cities

Cities and real estate firms are urged to adapt to shifts in demand by developing mixed-use neighbourhoods, constructing more adaptable buildings, and designing multi-use office and retail space.

“Superstar cities are facing a new reality in which hybrid work worsens vacancy rates, threatens the vibrancy of neighbourhoods, and thus makes urban cores less attractive to employers, employees, and residents,” the researchers state.

“To adapt to that new reality, urban stakeholders could consider adopting more hybrid approaches themselves. At the neighbourhood and building levels, and even in the design of the floors of buildings, choosing diversity, adaptability and flexibility rather than homogeneity can help cities thrive.”

This year, cities including San Francisco, Washington, D.C. and most recently Seattle have released Downtown recovery and revitalisation plans. Last month, San Francisco announced a new initiative to encourage the conversion of underutilised office buildings for other uses. Respondents were invited to propose forms of city assistance such as zoning modifications, fee adjustments, and local tax breaks.