Waiting or seeking change?, The vacancy rate of office buildings in major global cities such as New York and London has increased over the past three years
The vacancy rate of office buildings in major cities around the world, which has received much attention, is an important indicator for measuring urban vitality. The McKinsey Global Research Institute has found that from 2019 to 2022, the vacancy rates of office buildings in cities such as New York, London, and Shanghai have all increased. In the view of the research team, this is not only a challenge, but also an opportunity for the real estate market to achieve historical transformation.
According to data provided by McKinsey Global Research Institute to reporters, the vacancy rates of office buildings in major cities around the world such as San Francisco, London, New York, Houston, Paris, Munich, Tokyo, Shanghai, and Beijing have all shown an upward trend in the past three years. Among them, San Francisco had the highest growth rate, at 12.9 percentage points; London is second, at 10.1 percentage points; Paris and Munich have the lowest growth rates, with 2.3 percentage points and 2.5 percentage points respectively. New York is 7.98 percentage points, and Shanghai is 7.48 percentage points.
There are two reasons for this trend. One is the supply growth brought about by the completion of new office buildings, and the other is the decrease in office demand. From a demand perspective, people's behavior has changed due to the pandemic, and working from home and online is becoming popular. Due to a decrease in the frequency of employee visits to the office, many companies are reducing costs by reducing office space, ultimately leading to a general decline in office demand in major cities around the world.
Research shows that the overall attendance rate of global offices is 70% before 2019. Global respondents work an average of 3.5 days per week in the office. Beijing takes about 3.9 days and Shanghai takes about 3.7 days, both slightly higher than the global average. In the knowledge economy fields such as professional services, information, and finance, employees are not limited by space, so they spend 0.2 fewer days working in the office per week compared to other industries.
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In most major cities around the world, a decrease in office attendance has also led to a decrease in actual rent. The decline in urban rents in the United States is particularly significant, with rents in San Francisco falling by 28% and New York falling by 18% from 2019 to 2022. Rent in European cities is more resilient, with decreases of 10% and 12% in Paris and London, respectively.
Another trend is that tenants prefer high-quality office space. From 2020 to 2022, in many major cities in the United States, the rental and demand growth rate of Grade A office buildings was higher than that of Grade B office buildings. Although many tenants are downsizing to save expenses, there are also some tenants who have paid higher rental prices in the hope of providing attractive space for their employees. Some companies adopt both approaches: a large professional services company recently integrated its New York office, closed two old 800000 square feet of office space, and opened a new top tier 450000 square feet of office space.
The decrease in area demand and the increase in quality requirements bring new opportunities. "Developers and homeowners may be able to find another way out by improving the adaptability and flexibility of buildings," said Hua Johnson, Senior Managing Partner at McKinsey Global and Co President of McKinsey Global Research Institute.
Cities can adapt to this change by constructing comprehensive neighborhoods, no longer focusing on a single type of product, but diversifying the combination of office buildings, residential and retail spaces. Research has shown that compared to neighborhoods with dense office buildings, comprehensive neighborhoods are less affected by sporadic factors such as the epidemic, which can improve the resilience of the real estate market. Tokyo is particularly typical, with low vacancy rates and declines, and rent increasing instead of decreasing, which is closely related to its public transportation oriented urban planning. Due to the convenience and short commuting time, people have a relatively stronger willingness to go out to work.
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The McKinsey Global Research Institute also believes that cities need to design multi-purpose office and retail spaces. This mixed type of building can flexibly respond to changes in tenant demand. By reserving renovation space and adding hotels and other commercial purposes, it helps to maintain the future vitality of the city. In addition, developers need to improve their level of humanized design, such as designing power lines for different types of groups before the project breaks ground, how residents can travel from apartments to cafes and then to subway stations in the morning, or how office employees can purchase daily necessities on their way home from work.