The $500 billion ‘office real estate apocalypse’: Researchers find effect of remote work even worse than expected
The pandemic-driven work-from-home era is decimating the office sector, with vacancy rates rising and property values declining. And a group of researchers who previously estimated the effect of remote work on office property values have revised their assessment, apparently suggesting things are worse than they thought.
In an article published last year, researchers from New York University and Columbia University estimated a 28% decline in the value of New York City offices by 2029, adding up to a loss of $49 billion. And in his model, that equates to $500 billion of “value destruction” across the country. The researchers, Arpit Gupta, Vrinda Mittal and Stijn Van Nieuwerburgh, revised their estimate this month in the latest version of their article, titled: “Working from home and the office real estate apocalypse.” Now they see a 44% decline in New York City office values by 2029, and nationwide value destruction of, as they say, $506 billion in just a three-year period, from 2019 to 2022.
The reason behind his revised, but bleaker assessment?
In their article, the authors argue that remote work has caused significant drops in rental income, occupancy, lease renewal rates, and market rents in the office sector within commercial real estate. All of which has affected cash flow, at a time when the Federal Reserve has aggressively raised interest rates. Interestingly though, they found that lower-quality office properties were more susceptible to the impacts listed above and at higher risk of becoming a “stranded asset,” they wrote. There is still an underlying uncertainty in their model, which they point to, the future of remote work.
Studying rental level data from more than 100 US office markets, the authors found an 18.51% decline in rental income between December 2019 and December 2020, just a few months later. from the start of the pandemic. The number of leases per square meter and rents from leases also fell in the same period. Meanwhile, vacancy rates in several major markets are at record levels, the authors wrote, pointing to New York City, which has an office vacancy rate of more than 20% in the first quarter of this year. Additionally, the authors said they found a “direct connection” between companies’ remote work policies and reductions in their actual rented office space.
“The key takeaway from our analysis is that remote work is poised to massively alter the value of commercial office real estate in the short to medium term,” the authors wrote.
Still, the effects are not uniform across the country or across properties. The authors found that higher-quality buildings—that is, buildings with higher rents that were built more recently—”appear to be doing better,” which they say is consistent with the idea that companies need to improve quality. quality of the offices so that the workers want to return. Furthermore, they found that cities with higher exposure to work from home are experiencing larger drops in office demand, which is clearly shown in these two examples. Looking at San Francisco and Charlotte, they found that the former’s office sector saw larger declines, which was to be expected as San Francisco office properties have been hit particularly hard by the shift to remote work. Still, both markets saw declines in their office valuations.
“We estimate a reduction in office stock value between the end of 2019 and 2022 of $69.6 billion for New York, $32.7 billion for San Francisco, and $5.1 billion for Charlotte,” the authors wrote. “For the remaining office markets, we combine market-specific rental income declines with changes in the New York City assessment rate to calculate the decline in value. Nationwide, we found a decrease of $506.3 billion in the value of offices in the three-year period.”
The largest drops in property values for dollar losses over that three-year period were seen in New York City, San Francisco, Los Angeles, San Jose and Boston, which the authors say could affect local governments heavily dependent on property taxes, triggering an “urban fatality loop.”