The pandemic that spurred the work-from-home era has devastated the office sector, with soaring vacancy rates and falling property values. And a group of researchers who previously estimated the impact of remote working on office property values has now revised their assessment, seemingly indicating that things are worse than they thought.
in paper published last yearResearchers from New York University and Columbia University estimate a 28% drop in New York City office values by 2029, bringing total losses to $49 billion. And in their model, that’s the equivalent of $500 billion in “value destruction” nationwide. The researchers – Arpit Gupta, Vrinda Mittal and Stijn Van Nieuwerburgh – revised their estimates this month in the latest edition of their paper: “Work From Home and the Office Real Estate Apocalypse.” They are now seeing a 44% drop in New York City office values by 2029, and nationwide value destruction, they said, of $506 billion in just the three-year period from 2019 to 2022.
What is the reason for their revised, but more bleak assessment?
In their paper, the authors argue that telecommuting has led to significant declines in rental income, occupancy, lease renewal rates, and market rents in the office sector within commercial real estate. And it all affected cash flow, at a time when the Federal Reserve raised interest rates dramatically. Interestingly though, they found that lower-quality office real estate was more vulnerable to the aforementioned shocks, and they were more at risk of becoming a “stranded asset,” they wrote. There remains a fundamental uncertainty in their model, which they note, is the future of remote work.
In examining rental level data for more than 100 US office markets, the authors found an 18.51% drop in rental income between December 2019 and December 2020, just months into the pandemic. The amount of newly signed leases per square foot and rents for newly signed leases decreased in the same period. While vacancy rates in many major markets are at record levels, the authors wrote, pointing to New York City, which had an office vacancy rate of more than 20% as of the first quarter of this year. In addition, the authors said they found a “direct link” between corporate teleworking policies and reductions in actual rented office space.
“A key finding from our analysis is that telecommuting is shaping up to significantly disrupt the value of commercial office real estate in the short and medium term,” the authors wrote.
However, the effects are not uniform across the country or across properties. The authors found that high-quality buildings, also known as recently built high-rent buildings, “look better,” which they claim is in line with the notion that companies should improve office quality so workers want to come back. In addition, they found that cities with more work from home experience a greater drop in demand for offices, which is clearly seen in these two examples. Looking at San Francisco and Charlotte, they find that the former office sector experienced a larger decline, which is to be expected as San Francisco office property has been hit particularly hard with the shift to remote work. However, both markets saw their office ratings decline.
“We calculate a decline in the value of office inventory between the end of 2019 and 2022 of $69.6 billion for New York City, $32.7 billion for San Francisco, and $5.1 billion for Charlotte,” the authors wrote. “For the remaining office markets, we combine declining market-specific rental yields with valuation ratio changes for New York City to calculate impairment. Nationally, we found a decline of $506.3 billion in office values in the three-year period.”
The largest declines in property values in terms of dollar losses over the 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 that rely heavily on property taxes, leading to an “urban cycle of doom.” .