How Will Office Space Values Fare in 2030?

Houston skyline. Image by Larry Gibson/iStockphoto.com

How’s this for short and to the point: “There will be less demand for office space,” with just a “moderate scenario” predicting a median 13 percent decline in major cities globally by 2030, in parallel with an excess supply of office space (beyond average historical vacancy) of 7 to 21 percent.

Across nine global “superstar cities,” the value of office space is expected to decline by 26 percent under that moderate scenario—and by 42 percent under a severe one. At stake is $800 billion in the value of office space in just nine cities by 2030.

All this and more is from a new report, Empty spaces and hybrid places, by McKinsey & Co.’s real estate practice and the McKinsey Global Institute.

Although the message isn’t necessarily surprising to anyone who’s in commercial real estate, the extent of those demand and value drops is sobering.

The report states that the decline in value is already occurring, as capitalization rates for office space in the U.S. have risen from 5.8 percent to 8.0 percent over the past three years, implying value erosion of more than 35 percent before accounting for net operating income decline.

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In the worst cases, the report continues, the owners of buildings whose values have fallen will hold less equity in relation to debt, making it harder for such owners to get financing. As a result of a “doom loop” like that, “aging and low-quality properties may remain unrenovated or not repurposed, further reducing property values.”

This in turn could be aggravated by the ongoing “flight to quality,” as office tenants act on their desire for better and better-amenitized spaces.

What’s driving all this are three trends, McKinsey says:

• the pandemic-led surge in working from home (office attendance has stabilized around 30 percent lower than before the pandemic)
• a resulting population shift from urban cores to the suburbs
• the growth of online shopping, along with an enduring loss of about 10 to 20 percent in foot traffic near stores in metro areas.

Major steps backward

It’s noteworthy that average office attendance varies widely (by nearly a full work day per week in the office) by industry. Professional services is at the low end, at almost exactly three days a week in the office, while fields like education, manufacturing, real estate(!) and government average 3.5 days or more.

Still, under McKinsey’s scenarios, “demand for office and retail space is generally lower in 2030 than it was in 2019, but the reductions are smaller than those projected by many other researchers.”

Some cities, no surprise, are expected to fare better than others. The report highlights Houston as a city where office demand might remain strong, if only because of the metro’s steady population and employment growth.

There are solutions, McKinsey says. “Cities and buildings can adapt and thrive by taking hybrid approaches themselves. Priorities might include developing mixed-use neighborhoods, constructing more adaptable buildings, and designing multiuse office and retail space.”