Remote work risks wiping $800 billion from the value of office buildings in major cities worldwide by 2030 as the post-pandemic trend pushes up office vacancy rates and drives down rents, according to a new report.
Office attendance has stabilized at 30% below pre-Covid norms and only 37% of workers are going into the office every day, McKinsey Global Institute said in a report Thursday.
The research adds to a string of recent signs that lasting changes to working habits because of the pandemic are hurting the value of commercial real estate — a market also under strain from rising interest rates. Last month, HSBC
(HBCYF) announced plans to halve the size of its global headquarters, giving up its imposing tower in London’s Canary Wharf business district for a much smaller building close to the city center.
A sign sits on the HSBC Holdings Plc headquarters office building in the Canary Wharf business, financial and shopping district of London, U.K., on Friday, Sept. 18, 2020. After a pause during lockdown, lenders from Citigroup Inc. to HSBC Holdings Plc have restarted cuts, taking gross losses announced this year to a combined 63,785 jobs, according to a Bloomberg analysis of filings. Photographer: Simon Dawson/Bloomberg via Getty Images
Simon Dawson/Bloomberg/Getty Images
HSBC is downsizing its headquarters and leaving London’s Canary Wharf
“Hybrid work is here to stay,” McKinsey said. “Urban real estate in superstar cities around the world faces substantial challenges. And those challenges could imperil the fiscal health of cities, many of which are already straining to address homelessness, transit needs, and other pressing issues.”
McKinsey looked most closely at nine “superstar” cities with a disproportionate share of the world’s urban gross domestic product, namely Beijing, Houston, London, New York, Paris, Munich, San Francisco, Shanghai and Tokyo.
The estimated $800 billion in valuation losses in those cities represents a 26% decline from 2019 levels. In a more severe scenario, the value of office space could fall by as much as 42%, the consultancy said.
“The impact on value could be even stronger if rising interest rates compound it,” McKinsey added. “Similarly, the impact could be stronger if troubled financial institutions decide to more quickly reduce the price of property they finance or own.”
There are fears that a downturn in commercial real estate could cause losses at banks, which finance many of the industry’s deals. In the United States, where lending comes mostly from small and mid-sized banks, credit conditions have already tightened.
Pedestrians walk by a the Westfield San Francisco Centre on June 14, 2023 in San Francisco, California. San Francisco’s downtown continues to struggle with keeping retail and commercial properties rented following the COVID-19 pandemic, and lags behind all major cities in the U.S. and Canada. Westfield has stopped making payments on a $558 million loan for their mall at 865 Market St. weeks after their anchor tenant Nordstrom announced plans to pull out of the mall. Downtown San Francisco has an estimated 18.4 million square feet of available real estate.
Justin Sullivan/Getty Images
San Francisco mayor proposes tearing down Westfield Mall and other shuttered downtown retailers
Waning demand for office space has driven down landlords’ asking rents, with US cities suffering the sharpest falls, McKinsey found. In San Francisco and New York last year, asking rents fell 28% and 22% respectively, compared with 2019, once inflation is taken into account.
In a moderate scenario, demand for office space could be 13% lower by the end of the decade than it was in 2019.
While the rate at which people are moving out of cities has returned to its lower pre-pandemic trend, “few of the people who left will return” and “urban shopping will not fully recover,” the consultancy said.
Foot traffic near stores in urban areas remains 10-20% lower than it was before the pandemic, partly driven by growth in online shopping.
McKinsey said cities could adapt to the declining demand for office space by “taking a hybrid approach themselves,” developing multi-use office and retail space and constructing buildings that can be easily adapted to serve different purposes.
In an interview at Bloomberg’s Technology Summit last month, San Francisco Mayor London Breed proposed remaking the struggling city’s downtown by tearing down abandoned retail space, including Westfield mall. She suggested a laboratory or soccer stadium could be built in its place.
TORONTO – One expert predicts Ottawa‘s changes to mortgage rules will help spur demand among potential homebuyers but says policies aimed at driving new supply are needed to address the “core issues” facing the market.
The federal government’s changes, set to come into force mid-December, include a higher price cap for insured mortgages to allow more people to qualify for a mortgage with less than a 20 per cent down payment.
The government will also expand its 30-year mortgage amortization to include first-time homebuyers buying any type of home, as well as anybody buying a newly built home.
CIBC Capital Markets deputy chief economist Benjamin Tal calls it a “significant” move likely to accelerate the recovery of the housing market, a process already underway as interest rates have begun to fall.
However, he says in a note that policymakers should aim to “prevent that from becoming too much of a good thing” through policies geared toward the supply side.
Tal says the main issue is the lack of supply available to respond to Canada’s rapidly increasing population, particularly in major cities.
This report by The Canadian Press was first published Sept. 17,2024.
OTTAWA – The Canadian Real Estate Association says the number of homes sold in August fell compared with a year ago as the market remained largely stuck in a holding pattern despite borrowing costs beginning to come down.
The association says the number of homes sold in August fell 2.1 per cent compared with the same month last year.
On a seasonally adjusted month-over-month basis, national home sales edged up 1.3 per cent from July.
CREA senior economist Shaun Cathcart says that with forecasts of lower interest rates throughout the rest of this year and into 2025, “it makes sense that prospective buyers might continue to hold off for improved affordability, especially since prices are still well behaved in most of the country.”
The national average sale price for August amounted to $649,100, a 0.1 per cent increase compared with a year earlier.
The number of newly listed properties was up 1.1 per cent month-over-month.
This report by The Canadian Press was first published Sept. 16, 2024.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
