Study Forecasts $500B Lost in Office Value

There’s some ugly reality settling in for the office real estate market, if researchers from the NYU Stern School of Business and the Columbia University Graduate School of Business are correct.

In their recent paper, Work From Home and the Office Real Estate Apocalypse, Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh argue that the work-from-home shift since the pandemic has caused significant changes in “lease revenues, office occupancy, lease renewal rates, lease durations, and market rents.”

“We find a 32% decline in office values in 2020 and 28% in the longer-run, the latter representing a $500 billion value destruction,” they wrote. “Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability.”

Interestingly, the paper starts with a 1989 quote from Peter Drucker: “Commuting to office work is obsolete. It is now infinitely easier, cheaper, and faster to do what the nineteenth century could not do: move information, and with it, office work, to where the people are. The tools to do so are already here: the telephone, two-way video, electronic mail, the fax machine, the personal computer, and so on.”

The basic tools have been around for years, becoming better, easier to use, and cheaper. But it was the necessities of the pandemic that pushed widespread adoption of remote work where possible. According to the researchers, office occupancy dropped from 95% in February 2020 to 10% within a month. By May 2022, it was only back to 50%.

If work continues on or even close to this path, a lot of office space might not be necessary, meaning massive financial implications for land values and therefore valuations in lending, nearby retail space, and tax resources for local governments.

The researchers looked at “lease-level data for 105 office markets throughout the United States over the period from 2000 until December 2021,” from CompStak. They analyzed cash flows, measured firms’ remote work plans by examining job postings at online site Ladders, and estimated reductions in leased office space.

“We document an 8 percentage point decrease in lease revenue between January 2020 and December 2021. This decline entirely reflects decreases in the quantity of in-force leases rather than shifts in rents on in-force leases. The quantity of newly-signed leases in our data set falls from 300 million square feet per year just before the pandemic to below 100 million square feet in the last quarter of 2021. Rents on in-force lease contracts growth throughout the pandemic. Rents on newly-signed leases fell by 9.9% in real terms between January 2020 and December 2021, before reversing sharply to pre-pandemic levels by the end of 2021.”

The changes don’t fall evenly. There is “some evidence of a ‘flight to quality,’ particularly in rents.” But rents everywhere may have yet to bottom out, as vacancy rates are at 30-year highs in multiple metros and on average two-thirds of leases haven’t come up for renewals yet.

“We underestimate lease revenues by a factor of about 2.8,” they noted. “The total decline in commercial office valuation might be, as a consequence, around $586 billion in the short-run and $498 billion in the long-run.”

There are also some critical estimates in the paper, including the persistence of working from home, which drives the entire analysis. If reality deviates from this estimate, so would the potential loss of value.