Researchers from New York University and Columbia University have revised their assessment of the effect of remote work on office property values, suggesting the situation is worse than they thought. The authors argue that remote work has led to significant drops in lease revenue, occupancy, lease renewal rates and market rents in the office sector, affecting cash flow at a time when the Federal Reserve has raised interest rates. The authors found that lower quality office properties were more susceptible to the shocks listed above, and were at a greater risk of becoming a “stranded asset”. In studying lease level data for more than 100 office markets in the US, the authors found an 18.51% decrease in lease revenue between December 2019 and December 2020.
As reported in a recent article by Fortune, the pandemic-induced work-from-home era has had a devastating impact on the office sector, with rising vacancy rates and declining property values. In fact, a group of researchers from New York University and Columbia University have revised their initial estimate of a 28% decline in New York City office values by 2029, to a much bleaker 44% decline. This revision suggests a nationwide value destruction of $506 billion in just a three-year period from 2019 to 2022, due to remote work’s significant drops in lease revenue, occupancy, lease renewal rates, and market rents in the office sector.
The researchers, Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh, published a paper last year titled “Work From Home and the Office Real Estate Apocalypse,” which estimated the effect of remote work on office property values. However, in their latest version of the paper, they have revised their estimate to reflect the increased impact of remote work on the office sector. They argue that the decline in lease revenue, occupancy, lease renewal rates, and market rents has affected cash flow, at a time when the Federal Reserve has aggressively raised interest rates.
Their study of lease level data for over 100 office markets in the U.S. found an 18.51% decrease in lease revenue between December 2019 and December 2020, just months following the start of the pandemic. The quantity of newly signed leases by square footage and rents of newly signed leases also fell in that same period. Additionally, vacancy rates in several major markets are at record-highs, with New York City having an office vacancy rate of more than 20% as of the first quarter of this year.
Interestingly, the authors found that lower quality office properties were more susceptible to the shocks listed above and were at a greater risk of becoming a “stranded asset.” However, there is still uncertainty in their model, which they note, is dependent on the future of remote work.
The impact of remote work on the office sector has been more severe than initially anticipated, and the researchers’ revised estimate highlights the need for the industry to adapt to changing work patterns. As companies continue to embrace remote work, it is likely that the demand for office space will continue to decline. The office sector must find ways to reinvent itself to remain relevant in a post-pandemic world.
