Embracing mixed-use could prevent $800bn fall in office values

Global real estate has failed to keep up with shifts in working patterns caused by the pandemic, but a global slump in demand could be reversed by embracing mixed-use. Unless radical steps are taken, $800bn will be wiped from office values in nine ‘superstar’ cities, including London. A new report by McKinsey states that the cities have lost 7% of their populations, while office attendance is down by 30% on average. The report looked at 24 global cities, ranging from Atlanta to Beijing to Cologne, deducing that demand for real estate across the board would be lower in 2030 than in 2019. But McKinsey looked most closely at nine “superstar” cities – Beijing, Houston, London, New York, Paris, Munich, San Francisco, Shanghai and Tokyo – which have a disproportionate share of the world’s urban gross domestic product. In the consultancy’s ‘moderate scenario’ a 26% decline from 2019 values will wipe $800bn off office values in those cities. But a more severe scenario by the consultancy stated that value of office space could fall by as much as 42%, or $1.3tn. “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.” Demand for offices will fall by an average of 13%, it said, while demand for retail space will shrink by 9%. But cities without a strong mixed-use character would fare far worse. In Los Angeles, that would result in a 20% fall in demand for offices and a 17% drop for retail, but only a 2% fall for residential. The report concluded that hybrid working must lead to hybrid cities, embracing a mix of uses. Not only that, office buildings should be reimagined as mixed-use entities, perhaps even sharing uses on the same floors. To send feedback, e-mail piers.wehner@eg.co.uk or tweet @PiersWehner or @EGPropertyNews