A McKinsey report suggests that demand for urban core office and retail space will continue to decrease in the coming years.

There’s been much talk about back-to-work mandates and a slowdown of outward migration from cities to the suburbs. All of this has an impact on commercial real estate. A recent report by McKinsey explains that cities aren’t back to normal by a long shot. And if those cities don’t rethink their CRE uses, this could lead to a loss of vibrancy.

The report, entitled “Empty Space and Hybrid Places: The Pandemic’s Lasting Impact on Real Estate,” suggested a “big-picture” viewpoint of commercial real estate, especially office. Specifically, by modeling various scenarios, McKinsey analysts found that demand for office and retail space will fall between 2019 and 2030.

Analyzing the “Superstar” Cities

In determining its forecast models, the McKinsey Global Institute examined what they called the “superstar” cities. These are “cities with a disproportionate share of the world’s urban GDP and GDP growth.” This grouping includes Beijing, Houston, London, Paris, New York City, Paris, Munich, San Francisco and Tokyo.

In the urban cores of these superstar cities:

• The percentage of vacant office and retail space has increased since 2019

• Home prices grew more slowly than in suburbs and other cities

The McKinsey experts then modeled future demand for office, residential and retail space through several scenarios. Demand for this space by 2030 is generally lower in all scenarios than in 2019. In analyzing these scenarios, the experts examine factors like long-term population and employment trends, office attendance patterns by industry, the share of a city’s commuter population and shopping trends.

One issue that continues popping up is hybrid work.

The Hybrid Work Trend

The McKinsey report acknowledged that workers are coming back to the office. It also noted that “the rate of (population) out-migration has now returned to its pre-pandemic trend.” However, “our research suggests that few people who left will return and that urban shopping will not fully recover.” Employees continue to eschew working full time at the office, instead taking to remote and hybrid work.

Not All the Same

Real estate is a highly local sector. The McKinsey report acknowledged this, pointing out that impacts on demand will vary based on the following:

Business mix. Cities with a large employee base of knowledge workers and a higher ratio of commuters to residents, and a more significant degree of remote work acceptance could mean a reduction in office space demand directly (and retail space, indirectly).

Urban structure. Cities with office-dense real estate and minimal mixed-use and residential tend to have less demand. This is because these areas are less desirable for live-work-play.

Some Solutions

The report offered suggestions to help improve demand for both office and retail space:

• Mixed-use development at the neighborhood level

• Constructing adaptable, more flexible space; neutral-use buildings

• Design multi-use, modular floor space