US Office Buildings Could Lose US$500bil In Value Due To Remote Work
USA – A working paper from researchers at New York University (NYU) and Columbia University forecasted that office buildings across the country could suffer a US$500 billion loss in their value come 2029 compared to their pre-pandemic prices if the present remote work trend continues, according to a recent report from Fortune.
In particular, the study showed that market value of office properties in New York City fell by about 33 percent year-on-year in 2020. Extended to all office buildings nationwide, prices could contract by 28 percent in 2029 compared to their values in 2019, even as more employees eventually return to their office, but the percentage of decline could be higher.
“Imagine thinking about a path where the world remains in this predominantly hybrid or remote work environment that we’re currently in for the next 10 years, then the decline is larger—it would be 38 percent instead of 28 percent,” Stijn Van Nieuwerburgh, a finance and property professor at Columbia University’s Graduate School of Business.
The research team also includes Vrinda Mittal, a Ph.D. student at Columbia Business School, and Arpit Gupta, Assistant Professor of finance at NYU’s Stern School of Business.
For the working paper, the researchers analyzed rental data from CompStak, a database of commercial transactions that covers 105 office markets across the US. They discovered that office lease revenues have already dropped 8 percent between January 2020 and December 2021. Those losses are attributed to tenants who chose not to renew their leases or downsized their office space. They also found out that firms with a bigger share of remote job listings were more likely to reduce their demand for office space.
However, the worst has yet to happen, as long tenancies averaging 7 years signed before the pandemic and short tenancies inked during the virus outbreak would simultaneously be up for renewal in the next few years.
And of those tenants that have renewed their office leases, many are now choosing shorter tenures. In fact, data from Moody’s Analytics showed that short office leases of one year or less rose from 15 percent in 2019 to 26 percent in 2020 and 32 percent in 2021.
“I like to think of this as a train wreck in slow motion, where essentially, only a third of the leases have even come up for renewal. There’s still a lot of decisions about space to be made in the next several years as these leases roll off,” noted Van Nieuwerburgh.
Specifically, the office properties most impacted are those categorised as Grade A-, B, and C, older commercial properties that account for the majority of the market in terms of value and area. These could see a 44 percent slump in their value unlike the newer Grade A+ office towers that have healthy occupancy and command higher office rents.