$500 billion ‘office real estate apocalypse’: Researchers find impact of remote working worse than expected

In a paper published last yearResearchers from New York University and Columbia University forecast a 28% drop in New York City office values ​​by 2029, resulting in a total loss of $49 billion. And in their model, this equates to $500 billion of “value destruction” nationwide. The researchers—Arpit Gupta, Vrinda Mittal, and Stijn van Nieuwerberg—revised their estimate this month in the latest edition of their paper, titled: “Work from Home and the Office Real Estate Apocalypse.” They now see a 44% decline in New York City office values ​​by 2029, and a nationwide value destruction of $506 billion in just the three-year period from 2019 to 2022.

The reason behind his revised, yet bleak assessment?

In their paper, the authors argue that remote working has led to significant declines in lease revenue, occupancy, lease renewal rates and market rents in the office sector within commercial real estate. All of this has impacted cash flow, at a time when the Federal Reserve has been aggressively raising interest rates. However, interestingly enough, they found that lower-quality office properties were more susceptible to the shocks listed above, and were at greater risk of becoming “stranded assets,” they wrote. There is still an inherent uncertainty in their model, which, they note, is the future of remote work.

Studying lease level data for more than 100 office markets in the US, the authors found an 18.51% decrease in lease revenue between December 2019 and December 2020, months after the start of the pandemic. The volume of newly signed leases by square footage and rents for newly signed leases also fell over the same period. Meanwhile, vacancy rates are at record-high levels in several major markets, the authors wrote, pointing to New York City, which has an office vacancy rate of more than 20% as of the first quarter of this year. Additionally, the authors said they found a “direct correlation” between companies’ remote working policies and reductions in their actual leased office space.

“The main conclusion from our analysis is that remote working is massively disrupting the value of commercial office real estate in the short and medium term,” the authors wrote.

Yet, the impacts are not uniform across the country or across properties. The authors found that high-quality buildings, aka high-rent buildings that were built more recently, “seem to do better,” which they claim is consistent with the notion that companies want workers to return. To improve the quality of office. Additionally, they found that cities with higher work from home exposure are seeing a larger decline 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 declined more than might be expected because San Francisco’s office properties have been hit particularly hard with the shift to remote work. . Nevertheless, both markets saw a decline in their office valuations.

“We calculate a reduction in the value of office stock between the end of 2019 and 2022 to be $69.6 billion for NYC, $32.7 billion for San Francisco, and $5.1 billion for Charlotte,” the authors wrote. “For the remaining office markets, we combine the market-specific lease revenue decline with the change in NYC’s assessment ratio to calculate the decline in value. Nationwide, we find a $506.3 billion decline in office values ​​over the three-year period.

The biggest declines in property values ​​from 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 who own property. Depend heavily on taxes, triggering an “urban doom loop.”