When the COVID-19 pandemic began, it dramatically changed the way people worked, lived, and shopped in cities around the world. The starkest change was where and how they worked. Obeying lockdowns and office closures, tired of uncomfortable masks, and enabled by remote-work technology, many employees abruptly retreated from traditional offices to home offices. Many of those employees, newly freed from their daily commutes, chose to move out of urban cores. And now that fewer of them were working and living near urban stores, fewer of them shopped there. In recent months, some of those behavioral shifts have slowed. Others persist, particularly among office employees continuing to engage in hybrid work (that is, a combination of remote and in-office work).
The behavioral shifts have already had major effects on real estate in “superstar” cities—roughly speaking, cities with a disproportionate share of the world’s urban GDP and GDP growth. In superstar cities’ urban cores, the percentage of office and retail space that is vacant has grown sharply since 2019, and home prices have increased more slowly than in the suburbs and other cities.
To what extent could real estate in superstar cities continue to suffer? In this research, the McKinsey Global Institute has modeled future demand for office, residential, and retail space in several scenarios.1 In those scenarios, demand for office and retail space is generally lower in 2030 than it was in 2019, though the anticipated reductions in our moderate scenario are smaller than those projected by many other researchers. Our analysis also shows that the ripple effects will be complex—for example, that certain kinds of cities and neighborhoods will be more heavily affected than others. We considered a wide variety of factors, including long-term population trends; employment trends, such as the ongoing effects of automation; office attendance patterns by industry; employee coordination, defined as the maximum share of workers in the office at a given time; workers’ ages and incomes; the share of a city’s population that commutes from elsewhere; housing price variation among neighborhoods; and shopping trends, such as the ongoing increase in online shopping. In addition to many secondary sources, our modeling includes information from a large global survey that we conducted to understand the behavioral shifts caused by the pandemic.
We performed this research during a time of exceptional macroeconomic uncertainty. Inflation and interest rates are high; fears of recession are mounting; stress in the financial system has been making headlines. Actual outcomes, of course, will depend on how those variables and others play out.
What is certain is that urban real estate in superstar cities around the world faces substantial challenges. And those challenges could imperil the fiscal health of cities, many of which are already straining to address homelessness, transit needs, and other pressing issues. But the challenges also provide an opportunity to spur a historic transformation of urban spaces. By becoming more flexible and adaptable in everything from the makeup of neighborhoods to the design of buildings—in essence, becoming more “hybrid” themselves—superstar cities can not only adapt but thrive.
How hybrid work has changed the way people work, live, and shop
During the pandemic, workers’ office attendance plummeted. Untethered from their daily commutes, urbanites moved away from urban cores in greater numbers than they had before the pandemic (and fewer people moved in), and people spent less in urban stores (see sidebar, “How we define cities”). The rate of out-migration has now returned to its prepandemic trend, but our research suggests that few of the people who left will return and that urban shopping will not fully recover.