A joint research team from NYU and Columbia University studying the impact of remote work on office properties says office buildings will lose 28% of their value by 2029 if remote/hybrid work patterns become the norm.
In an academic paper entitled Work from Home and the Office Real Estate Apocalypse, the team projected that the overall “value destruction” in the US office sector could total more than $500B by 2029 if hybrid work takes root and lease revenue shrinks along with office footprints.
The research team, including Arpit Gupta of NYU’s Stern School of Business, Vrinda Mittal and Stijn Van Nieuwerburgh—both from Columbia University’s Graduate School of Business—studied the impact of remote work on the commercial office sector.
The team says it documented large shifts in lease revenues, office occupancy, lease renewal rates, lease durations and market rents as firms shifted to remote work during the pandemic.
“We show that the pandemic has had large effects on both current and expected future cash flows for office buildings. Remote work also changes the risk premium on office real estate,” the paper said, noting that office returns now are pricing in the risk that remote work now poses for offices.
Based on data generated by their study of the NYC office market, which produced an estimated value destruction of $49B by 2029, the researchers extrapolated their findings to the national market.
Analyzing CompStak lease-level data from 105 US office markets, the researchers found a decrease of 8% in lease revenue from January 2020 to December 2021, which they attributed to lower lease volume.
The paper suggests that lease revenue may eventually decline by rent reduction as well as shrinking office footprints, noting that more than two-thirds of office leases have yet to come up for renewal since the pandemic started, while office occupancy levels continue to hover at or below 43%.
The paper’s authors said higher quality offices have benefitted from a flight to quality, while lower quality offices are being buffeted by dramatic swings.
The paper warned that a $500B hit to office values would cause widespread collateral damage to the financial system, and to the fortunes of city centers that are filled with half-empty office towers.
“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 authors said.
“The spatial concentration of office assets in urban central business districts also poses fiscal challenges for local governments, which rely heavily on property taxes levied on commercial offices and the adjacent retail space to provide public goods and service,” the researchers added.