Working Remotely Can Cost Office Buildings Up to $800 Billion

A new report by the McKinsey Global Institute (MGI) reveals the potential financial impact remote work could have on office buildings, estimating a staggering loss of up to $800 billion in total value across nine major global cities. This study highlights the significant challenges faced by office building owners as employment trends continue to evolve following the Covid-19 pandemic.

The emergence of hybrid working, combining in-office and remote work, has caused a decrease in demand for office space and a subsequent rise in vacancy rates. MGI's report indicates that this trend will lead to a considerable decline in the valuation of office buildings in major cities by 2030. Cities such as London, Paris, Munich, San Francisco, New York, Houston, Tokyo, Beijing, and Shanghai could collectively experience an estimated $800 billion loss compared to 2019, representing a massive 26% decrease. In the pessimistic scenario, the decline could be as high as 42% compared to pre-pandemic levels.

MGI further warns that this vulnerability could be compounded if troubled financial institutions decide to sell off the office buildings they finance or own. These changes in work dynamics are not only impacting office space but also have a cascading effect on the value of retail and residential real estate, as people's shopping and living habits adapt to their new work arrangements.

According to MGI's medium forecast scenario, the demand for office space in major cities will be approximately 13% lower by the end of the decade. Currently, the office occupancy rate in the aforementioned cities remains 30% lower than pre-pandemic levels, with only 37% of employees returning to the office on a daily basis.

The shift towards remote work has not only reduced the amount of time employees spend in the office but has also fueled a migration trend away from major cities towards suburban areas, where affordable housing options are more plentiful.

As a result of the Covid-19 pandemic, tenants have downsized their office spaces, and many technology corporations have permanently adopted hybrid work models. The decrease in demand has led tenants to negotiate for shorter-term leases, creating challenges for property owners seeking financing.