Apocalypse Soon: Work-From-Home To Cut Office Values By $500B, Report Finds
As remote work becomes a more permanent fixture — despite the edicts of a few billionaires on returning to the office — the values of office buildings are headed south, researchers predict.
Office values in New York City will drop 28% by 2029, representing value destruction of $49B, according to a new study by academics at New York University and Columbia University, as lease revenue and the total number of leases drop.
Extrapolating to the national office market, the report estimates that about $500B in office asset valuation could vanish by 2029 as the same dynamic plays out everywhere laptop workers spend more time outside centralized offices.
“Remote work changes the risk premium on office real estate,” says the report, titled Work From Home and the Office Real Estate Apocalypse, authored by NYU's Arpit Gupta and Columbia’s Vrinda Mittal and Stijn Van Nieuwerburgh. “Office returns, in other words, are now pricing in the risk that remote work might be an important risk for offices.”
The report details the large shifts in lease revenues, office occupancy, lease renewal rates, lease durations and market rents as corporate tenants shifted to remote work with the onset of the coronavirus pandemic in 2020.
The study analyzed CompStak lease-level data from 105 U.S. office markets, finding a decrease of 8 percentage points in lease revenue from January 2020 to December 2021. All of the drop was due to lower lease volume instead of lower rents, according to the authors.
But the study suggests rents may be on the decline as well, as 66% of leases nationwide and 73% in New York haven't come up for renewal since before the start of the pandemic. Vacancy rates are already at 30-year highs in a number of major markets, including 20.4% in New York as of Q4 2021.
Not all office assets have been or will be impacted equally, however.
"Higher-quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings," the authors wrote.
"Because office assets are often financed with debt which resides on banks’ balance sheets and in CMBS portfolios, such declines in value would have large consequences for institutional investors and for financial stability," the report warns.
The hollowing out of central business district office markets also poses fiscal challenges for local governments, the report added, since they tend to rely on property taxes levied on commercial offices and the nearby retail space that formerly provided goods and services to office workers.