The pandemic has accelerated the era of working from home, and the office sector has been devastated by rising vacancy rates and falling real estate values. And researchers who previously estimated the impact of remote work on office property values have revised their estimates to suggest the situation is worse than they thought.
of Papers published last yearResearchers at New York University and Columbia University estimate that by 2029, New York City office values will fall 28%, with total losses of $49 billion. And in their model, this equates to $500 billion in “value destruction” across the United States. Researchers Arpit Gupta, Vrinda Mittal and Stein van Neuwerberg revised their estimates earlier this month in the latest edition of their paper titled “Working from home and the office real estate apocalypse.” They now expect New York City office values to fall 44% by 2029, bringing nationwide value destruction to $506 billion in just three years from 2019 to 2022.
What is the reason that their ratings have been corrected but become even darker?
In their paper, the authors argue that remote work has led to significant declines in lease income, occupancy rates, lease renewal rates, and market rents in the office sector of commercial real estate. All of this is having an impact on cash flow as the Federal Reserve aggressively hikes rates. Interestingly, however, lower-quality office properties were found to be more susceptible to the above shocks and at higher risk of becoming “stranded assets,” the researchers wrote. There is still fundamental uncertainty in their model, they point to the future of remote work.
The authors examined lease level data for more than 100 US office markets and found that lease income declined by 18.51% from December 2019 to December 2020, just months after the start of the pandemic. The number of newly concluded lease contracts per area and the rent of new contracts also decreased during the same period. Meanwhile, vacancy rates in several major markets are at record highs, the authors write, citing New York City, where office vacancy rates exceeded 20% as of the first quarter of this year. listed in Furthermore, the authors said they found a “direct relationship” between companies’ remote work policies and actual reductions in rented office space.
“A key takeaway from our analysis is that remote work is significantly destroying the value of commercial office real estate in the short and medium term,” the authors write.
Still, the impact is not uniform across the country or property. The authors found that quality buildings, i.e., recently constructed buildings with higher rents, “look better performing”, which is why companies are more likely to find offices because employees want to come back. It is consistent with the idea that there is a need to improve the quality of In addition, we found that the decline in office demand is greater in cities where there are many telecommuters. This is clearly demonstrated by these two examples. A survey of San Francisco and Charlotte found the former’s office sector to suffer the most, which is to be expected given that the shift to remote work has hit San Francisco office real estate particularly hard. right. Still, office valuations have fallen in both markets.
“We calculate that between the end of 2019 and 2022, New York City will lose $69.6 billion in office stock value, San Francisco $32.7 billion, and Charlotte $5.1 billion,” the authors write. “For the rest of the office market, we combine the market-specific decline in lease income with changes in New York City valuation ratios to calculate the decline in value. I see the dollar declining.”
The biggest declines in real estate values due to dollar losses over the past three years were in New York City, San Francisco, Los Angeles, San Jose and Boston. The authors say it could affect local governments that rely heavily on property taxes. “City Ruin Loop”.
