The pandemic-induced work-from-home era is taking a toll on the office sector, with rising vacancy rate and decrease in property values. And a group of researchers who previously estimated the impact of remote work on office property values, changed their assessment, suggesting that things are worse than they thought.
on a paper published last year, researchers from New York University and Columbia University estimated a 28% reduction in office values in New York City by 2029, amounting to a $49 billion loss. And in their model, that equates to $500 billion in “value destruction,” nationwide. The researchers—Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh—revised their estimate this month of latest version of their paper, titled: “Work From Home and the Office in the Real Estate Apocalypse.” They now see a 44% reduction in office values in New York City by 2029, and a destruction in value across the country, as they say, of $506 billion in just one three-year period. from 2019 to 2022.
The reason behind their revised, but darker assessment?
In their paper, the authors argue that remote work has led to a significant drop in rental income, occupancy, rental renewal rates, and market rents in the office sector. within commercial real estate. All that affects cash flow, at a time when the Federal Reserve is aggressively raising interest rates. However, interestingly, they find that low-quality office properties are more vulnerable to the shocks listed above, and have a greater risk of becoming a “stranded asset,” they wrote. Still there is an underlying uncertainty in their model, which they note, is the future of remote work.
Examining rental level data for more than 100 US office markets, the authors found an 18.51% decrease in rental income between December 2019 and December 2020, just a few months after the start of the pandemic. The number of newly signed leases by square footage and rents of newly signed leases also fell during the same period. All-time, vacancy rates in many major markets are at record highs, the authors wrote, pointing to New York City, which had an office vacancy rate of more than 20% in the first quarter this year. Additionally, the authors say they found a “direct connection” between companies’ remote work policies and reductions in their actual leased office space.
“The key takeaway from our analysis is that remote work is shaping up to be a massive erosion of the value of commercial office real estate in the short and medium term,” the authors wrote.
However, the effects are not uniform across countries or across properties. The authors found that higher-quality buildings, aka buildings with higher rents that were built recently, “appear to be better,” which they claim is consistent with the idea that companies must improve the quality of the office so that workers want to return. Additionally, they found that cities with more work from home exposure saw greater reductions 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 experienced more decline, which is expected because office properties in San Francisco have been hit harder by the shift to remote work. However, both markets saw their office valuations decline.
“We calculate a decrease in the value of office stock between the end of 2019 and 2022 of $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 combined market-specific rental income declines with valuation ratio changes for NYC to calculate the decline in value. Nationwide, found We saw a $506.3 billion reduction in office costs over the three-year period.
The largest declines in property values by 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 affects of local governments relying heavily on property taxes, causing an “urban doom loop.”