The $500 billion ‘Office real estate apocalypse’: Researchers find remote work’s effect even worse than expected

In a paper published last year, researchers from New York University and Columbia University estimated a 28% decline in New York City office values by 2029, totaling to a $49 billion loss. And in their model, that equates to a $500 billion “value destruction,” nationwide. The researchers—Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh—revised their estimate this month in the latest version of their paper, titled: “Work From Home and the Office Real Estate Apocalypse.” They now see a 44% decline in New York City office values by 2029, and a nationwide value destruction, as they put it, of $506 billion in just a three-year period from 2019 to 2022.

The reason behind their revised, yet bleaker assessment?

In their paper, 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 within commercial real estate. All of which has affected cash flow, at a time when the Federal Reserve has aggressively raised interest rates. Although, interestingly enough, they 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,” they wrote. Still there is an underlying uncertainty in their model, which they note, the future of remote work.

In studying lease level data for more than 100 office markets in the U.S., the authors 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. All the while, vacancy rates in several major markets are at record-highs, the authors wrote, pointing to New York City, which has an office vacancy rate of more than 20% as of the first quarter of this year. Additionally, the authors said they’ve found a “direct connection” between companies’ remote work policies and reductions in their actual leased office space. 

“The key takeaway from our analysis is that remote work is shaping up to massively…