The global surge in remote work, expected to persist, has left once bustling offices and business centers vacant, incurring maintenance costs for their owners. The deserted spaces urgently require new uses, as failure to address this issue may result in megacities losing billions of dollars, warn experts.
The onset of the coronavirus pandemic transformed the work landscape rapidly. The allure of remote work led many professionals to continue working from home even post-quarantine. Balancing work and personal life, saving on commute costs, and escaping constant supervision contributed to this shift. From 2020 to 2022, office attendance dropped by 30%, persisting into the current year. By July, only 37% of large firm employees globally had returned to offices, as reported by McKinsey.
The trend is expected to endure, with some employees expressing a willingness to quit if forced to return to daily office work. Some are even open to significant pay cuts for the flexibility to work from home at their discretion. High-ranking employees, with influence at the board or executive levels, are among those willing to take such risks.
Suburbanization trends emerged early in the pandemic and continue, impacting leading countries like the United States. Major urban cores, including New York and San Francisco, experienced population declines of 5% and 7%, respectively, from 2020 to mid-2022. Expensive megacities, with high real estate prices and dense office spaces, were most affected, leading citizens to sell homes and move to more affordable suburbs.
American megacities like Dallas, New York, San Francisco, and Boston, along with London in Europe, were particularly affected. The decline in office attendance has already caused a 40% reduction in US business premises costs, with a nine percent average price drop in 2022 alone. This poses risks for local companies with debt obligations of $1.5 trillion due by the end of 2025.
The Federal Reserve's tightening monetary policy, coupled with high inflation, further complicates matters. The key rate has remained at 5.25-5.5%, its highest since 2001. This poses challenges for refinancing loans, potentially increasing lending costs and impacting the banking sector.
Smaller regional banks, key financiers of the industry, are hesitant to issue new loans due to increased insolvency risks. Morgan Stanley's forecast suggests changes in conditions for over half of the $2.9 trillion commercial mortgages, with interest on new loans potentially rising by 3.5-4.5 points.
Similar challenges plague the European commercial real estate market, where loans exceeding 1.9 trillion euros need repayment, with 390 billion due by the end of 2023. Already, 175 billion in loans against real estate face disruption, attributed to the overall depreciation of commercial facilities, with UK prices down by over 20%.
Negotiations for debt refinancing are active in both the US and Europe to avoid bankruptcy and forced business center sales at unfavorable prices. McKinsey's forecast paints a grim picture, projecting potential losses of $800 billion for major global megacities if the remote work trend persists over the next six years. San Francisco and New York are expected to experience the largest reductions in office space, followed by London, Munich, Paris, Houston, and various Asian megacities.
The repercussions of the office crisis are poised to extend to both commercial and residential real estate near business hubs. As the demand for business premises dwindles, their rental prices will drop, leading to a continued decline in attendance, fueled by the urban population's exodus. While adjacent restaurants and shops could potentially remedy the situation with substantial discounts, the sharp decline in profits and business viability makes such actions unlikely.
The reduction in office attendance will result in an excess of vacant Class B and C spaces, predominantly located in older buildings. This includes Category B offices in more remote city areas and spaces repurposed from non-office enterprises (Category C). Employees, seeking to maintain the advantages of remote work, are motivated by reduced workloads, eliminating the need for expensive business attire and pricey lunches near office centers.
Several countries, including the USA, are preparing for a global transformation of business centers. Plans involve converting empty office buildings into apartment complexes to address the shortage of affordable housing in central city areas.
The UK's City of London Corporation plans to transform at least 1.5 thousand business premises in the "Square Mile" district into housing by 2030. The initiative includes the creation of park areas, cultural centers, bike paths, and high-speed 5G communication to revitalize the local city and adapt to post-pandemic realities.
The need for more active transformation of empty business premises was a key topic at the 2023 World Economic Forum in Davos. Experts foresee a growing number of business buildings worldwide falling into disrepair as current lease agreements expire. Without repurposing, these spaces face abandonment and potential demolition.
However, such initiatives require significant public investment, and the fate of depopulated offices worldwide hinges on the level of state subsidies and governmental interest. Otherwise, these deserted business centers will persist as unutilized spaces, occupying valuable urban real estate without contributing any benefits.
