A joint research team from NYU and Columbia University recently released a fascinating study on the impact of remote work on the office market. Their study is based in New York but is conceptually applicable to the office market overall.
In the abstract of this May 31, 2022 study relating to the impact of remote work on real estate, they report: “We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 32% decline in office values in 2020 and 28% (by 2029 if remote/hybrid work patterns become the norm) …. 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.”
Their study concluded that remote work is likely to persist. “Firms and employees have invested considerably to advance remote work possibilities. This has enabled major changes in locations where individuals work and live.”
They also found that there has been a dramatic decline in the number of new leases signed since the pandemic and the shortening of lease duration with a big increase in three-year leases versus historically longer terms for those that are signed. The study indicated that from 2023-2025 there will be even larger than expected lease expirations coming from pre-scheduled lease expiration of long-term leases, as well as the expiration of short-term leases signed during the pandemic. Landlords have been discounting new rents and providing large tenant improvement allowances to attract tenants.
We should note that New York tends to have lower capitalization rates than Chicago which can magnify the impact of declining property values. Regardless, these are substantial valuation changes that could have substantial implications for the office market and financial sector.
We have relied on a research paper “Work From Home and the Office Real Estate Apocalypse” by Arpit Gupta, Vrinda Mittal & Stijn Van Nieuwerburgh with NYU and Columbia University dated May 31, 2022.