**The Decline of Urban Real Estate: A Closer Look at the Future**
**Remote Work and its Effects on Demand for Urban Real Estate**
The shift to remote and hybrid work during the pandemic has had a significant impact on the demand for office space in urban areas. A survey conducted by our team revealed that as of fall 2022, workers were only going to the office an average of 3.5 days per week. This shift in work patterns has prompted many residents to move away from urban cores, no longer tied down by long commutes. For example, New York City’s urban core lost 5% of its population from mid-2020 to mid-2022, while San Francisco’s urban core lost 6%.
In addition, consumers have started shopping less at brick-and-mortar stores, especially those located in urban areas. Foot traffic near stores in metropolitan areas remains 10 to 20% below pre-pandemic levels, with a more significant decline observed in urban cores compared to suburbs.
**Projected Decline in Demand for Office, Retail, and Residential Space**
The reduced demand for office space due to remote work is expected to continue even after the pandemic. By 2030, our model predicts that demand for office space could be as much as 20% lower, depending on the city. Similarly, demand for retail space will also decrease as fewer consumers visit brick-and-mortar stores, especially in urban cores. In London, the hardest-hit city, demand for retail space is expected to be 22% lower in 2030 compared to 2019.
While the demand for residential space will still see growth in most superstar cities by 2030, it will be lower than it would have been without the pandemic. This lower demand is likely to restrain price and rent growth to some extent. Prices in the urban cores of superstar cities rose eight percentage points less quickly from the end of 2019 to 2022 compared to their suburbs.
**Implications for Urban Stakeholders**
The decline in demand for urban real estate will have significant implications for various stakeholders. In just nine cities that were closely studied, approximately $800 billion worth of office space could become obsolete by 2030. Macro-economic complications such as an interest rate spike followed by a severe recession or high inflation could further exacerbate the situation.
**Adapting to the Changing Landscape**
To address the challenges posed by reduced demand, stakeholders in the real estate industry need to adapt and take action now. Simply waiting for a recovery is not a viable option. Some stakeholders have dealt with these issues by ignoring them or temporarily repurposing empty spaces. However, a proactive approach is necessary for long-term solutions.
Real estate companies can become solution providers by partnering with clients to make hybrid work a competitive advantage. They have the advantage of recognizing patterns across their various properties and tenants, enabling them to offer insights and improvements to the employee experience in office spaces. Offering flexible lease options for tenants uncertain about their future space needs is also crucial.
Policymakers, on the other hand, can take advantage of the current surplus of space by encouraging mixed-use development in urban areas. Neighbourhoods that accommodate a mix of office, residential, and retail spaces have proven to be more resilient during the pandemic. Reforming restrictive zoning policies can be one step towards achieving this.
While the doomsday predictions for urban real estate may be overly pessimistic, there is no denying that the industry is facing reduced demand. It is essential for stakeholders to adapt to the changing landscape and actively seek solutions to address the challenges. The real estate industry can become a partner in making hybrid work successful, while policymakers can seize the opportunity to reimagine urban spaces and encourage mixed-use development. The time to act is now.