Hybrid work is here to stay. Will commercial real estate recover?

With work-from-home trends continuing, the commercial real estate sector is unlikely to recover for some time. Hybrid work schedules could lead to an $800 billion drop in commercial real estate values by 2030, according to a recent study by McKinsey & Company. 

The study found office worker attendance at 30% below what it was before the pandemic. In the United States, office values are unlikely to regain their peaks even by 2040, according to an economist with Capital Economics.

“The reduction in office demand due to remote work will cause a hit to net operating incomes on a par with, or worse than, that experienced by malls over the last six years,” Kiran Raichura wrote in the report.

The hybrid work trend is just the issue facing commercial real estate, said Lisa Knee, managing partner of real estate services at Eisner Advisory Group LLC. 

Hybrid is an issue that office park owners have to adjust to, and it took the retail commercial sector 10 to 15 years to figure things out, she said. 

“The office was never a 100% rental facility,” Knee said, noting that even before the pandemic, workers went into the office five days a week. Now it’s a matter of adjusting to two or three days a week.

The commercial real estate sector is facing stress due to higher mortgage interest rates and banks tightening credit. 

The study by McKinsey showed that cities such as London, Beijing, New York, Paris and Tokyo would see 13% less demand for office space in 2030 than in 2019.

The office market has been changing for the past decade, Knee said. The work-from-home trend is another factor in the process.

As leases expire, look for tenants to ask for shorter-term leases on office space, Knee said. “It’s going to be a test on real estate, but it’s also an opportunity out there,” she said.