Close to 18 months ago, McKinsey projected long-term impacts the pandemic might have on commercial real estate. The firm just revisited the predictions to see how they held up.
Unfortunately, McKinsey's latest projections painting a sobering picture for the future of office spaces. The firm estimates that by 2030, the sector could face a staggering $800 billion loss in real terms under a moderate scenario, translating to an average office value drop of 26% in just five years. This dramatic decline is primarily driven by a persistent fall in demand for office space, a trend that has been unfolding since 2019.
The market trends between 2019 and 2022 tell a compelling story of this shift. Total dollar transactional volume of office space plummeted by 57%, while the average sale price per square foot saw a 20% decrease. Additionally, asking rents in real dollars experienced a significant 22% drop. These figures underscore the profound changes taking place in the commercial real estate sector.
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At the heart of this transformation lies a fundamental change in work patterns. After an initial 90% drop in office attendance during the early stages of the pandemic, metropolitan areas have since stabilized at about 30% below pre-pandemic levels. As of October 2022, office workers were typically going into offices around 3.5 days a week. Aditya Sanghvi, a McKinsey Senior Partner, suggests that these attendance trends are likely to persist, pointing to the close alignment between current attendance patterns, expected post-pandemic attendance, and employee preferences.
Looking ahead, McKinsey's projections for office space demand are far from optimistic. Under a moderate scenario, demand is not expected to return to pre-pandemic levels for decades. By 2030, it could be up to 20% lower than in 2019, with variations depending on the city. In a more severe scenario, the drop could be as much as 38% compared to 2019 levels.
These projections take into account various factors, including employee preferences and the potential productivity impacts of hybrid work. Interestingly, about 10% of surveyed employees, including many senior staff, indicated they might quit if required to work in-office full-time, adding another layer of complexity to the situation.
The future of office space demand and valuation will likely hinge on several factors. These include the emergence of conclusive research on hybrid work productivity and potential shifts in the labor market that could affect employer bargaining power.
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