If current remote work patterns do not reverse, office buildings nationwide could take a $500 billion loss from their pre-pandemic value by 2029, according to a new report.
Over the course of 2020—at the outset of the pandemic—the market value of New York City’s office building stock plummeted by roughly a third, according to a working paper from researchers at NYU and Columbia released earlier this month. Extended to all U.S. office properties, values could fall 28% below what they were in 2019 over the next decade, even as more people eventually return to the office. But that percentage could be even 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,” one of the researchers, Stijn Van Nieuwerburgh, told Fortune. “Then the decline is larger—it’s 38% instead of 28%.”
The researchers started considering the impact of COVID-19 on the U.S. real estate landscape back in August 2020, said Van Nieuwerburgh, a finance and real estate professor at Columbia University’s Graduate School of Business. The research team also includes Arpit Gupta, assistant professor of finance at NYU’s Stern School of Business, and Vrinda Mittal, a Ph.D. student at Columbia Business School.
They analyzed lease data from CompStak, a database of commercial deal information that covers 105 office markets across the country, and found that lease revenues have already declined 8% from January 2020 to December 2021. Those revenue losses have come from firms that chose not to renew their leases, or renewed for less floor space than before. Companies with a larger share of remote job listings were more likely to be the same ones lowering their demand for commercial office space.
But the worst for office building owners may be yet to come. Office leases in the U.S. are lengthy, lasting an average of seven years in 2020, which means that in a few years, leases from before and during the pandemic will simultaneously be up for renewal.
“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,” Van Nieuwerburgh said. “There’s kind of still a lot of decisions about space to be made in the next several years as these leases roll off.”
And of those companies that have renewed their office leases, many are now opting for shorter lease lengths, “kicking the can down the road until basically, the dust settles on their remote working plans,” Van Nieuwerburgh said. Very short office leases of one year or less are on the rise, increasing from 15% in 2019 to 26% in 2020 and 32% in 2021, according to Moody’s Analytics.