It’s a standard story at this point: work-from-home seems to be establishing itself as commonplace in many companies–at least in the “hybrid” form where many or most workers come into the office 3-4 days each week, but work from home the remaining time. For many workers, part of the benefit is avoiding a commute to work. But when fewer people are commuting to work, the company needs less office space. Moreover, the market for meals and for retail in general that had been supported by commuters is reduced in size. Demand for office space falls, and demand for residential real estate near that office space falls as well (because the benefits of being close to the office are smaller if you don’t need to be there physically every work-day).
McKinsey Global Institute reviews these patterns in its report Empty spaces
and hybrid places: The pandemic’s lasting impact on real estate (July 2023). The report also offers some preliminary thoughts on how these shifts may alter the use of urban real estate. A theme that stuck with me was that if employers, retailers, and cities want people to commute, they need to act in a way that will “earn the commute.”
As background, the McKinsey report is focused on “nine superstar cities: Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai, and Tokyo”–although a broader group of cities is also surveyed and discussed. They find that rates of work-from-home seems to be settling at about 30% of work-days. This will shift markets including office real estate, urban retail, construction, and residential real estate.
Employers may both reduce their office space but also shift to newer and higher-quality office space, with better meeting rooms and greater capacity for sophisticated audio-visual equipment and teleconferencing. The firms can’t just tell employees to show up five days each week. If employees don’t see actual benefits from commuting to work in person, they will push back.
Like employers, retailers need to provide a reason for an in-person trip to their real estate, rather than an online connection. “Retailers too may have to `earn the commute by designing spaces that cater to many different uses. A prime example is stores that easily accommodate omnichannel retail—a single, seamless experience for customers, whether they shop online or in person. Similarly, stores can provide experiential retail. For example, one department store brand is launching smaller stores where customers can pick up products bought online, get clothes altered, find style advice, and patronize a beauty salon.”
Those who are building or refurbishing urban real estate need to think more about how use of the space is likely to vary over time. “To adapt to declining demand for traditional office and retail space, developers could create hybrid buildings. The most ambitious vision is a universal, `neutral-use’ building whose design,
infrastructure, and technology could be easily modified to serve different uses. Imagine a medical building that could be easily converted into, say, a hotel or an apartment building if customers’ preferences changed.”
Finally, residential real estate will shift as well: “Residential vacancy rates increased from 2019 to 2022 in every superstar urban core that we studied, from a
0.8-percentage-point increase in Tokyo to a 9.9-percentage-point increase in London; meanwhile, in the suburbs, vacancy rates grew much less or even declined. Prices followed suit, rising eight percentage points more slowly in US superstar urban cores than in their suburbs and 13 percentage points more slowly than in non-superstar urban cores. In San Francisco, nominal prices in some neighborhoods fell by 12 percent from the end of 2019 to 2022. Residences in San
Francisco’s urban core are now worth $750 billion less than they would have been if prices there had risen at the national average rate. The effect seems to be a global phenomenon.”
I sometimes say that the work-from-home movement quite suddenly converted a lot of what had been residential real estate into commercial real estate–that is, a part of many houses became a place where people worked. The McKinsey report offers estimates of how that shift is likely to reverberate in the medium- and the long-term.
