Remote Work Destroyed Even More Office Value Than Researchers Had Thought

Last fall, researchers from New York University’s Stern School of Business and from Columbia Business School looked at the effect of remote work on the office sector. “We document large shifts in lease revenues, office occupancy, lease renewal rates, lease durations, and market rents as firms shifted to remote work in the wake of the Covid-19 pandemic,” they wrote at the time.

“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.

But that was a working paper published at the National Bureau of Economic Research, which means the paper was “circulated for discussion and comment purposes” and not peer-reviewed. That is, usually these papers change over time with criticisms and suggestions from other researchers. This one certainly did. The results they found were actually worse than they originally thought, at least in percentage, though nominally in value destruction.

In the second version of the paper, which was released last month they wrote, “We revalue New York City office buildings taking into account both the cash flow and discount rate implications of these shocks, and find a 44% decline in long run value. For the U.S., we find a $506.3 billion value destruction.”

Using data from CompStak, they looked at 105 office markets in the U.S. between January 2000 and December 2022, in which they saw an 18.51% decrease in lease revenue. “Two-thirds of this decline reflects decreases in the quantity of in-force leases,” they wrote. “The remainder is accounted for by declines in real rents on in-force leases.”

Because property sales among this mostly privately owned property class greatly slowed, transaction data wasn’t reliable enough. They aggregated lease revenues for individual properties and subtracted costs for a net operating income, then discounted NOI to determine future cash flows as a basis of value, using the New York City office market to calibrate their model.

They did find evidence of the “flight to quality” often mentioned in anecdotal reports. “Higher quality buildings, those that are in the highest rent tier or are built more recently (informally called class A+), appear to be faring better. Their rents on newly-signed leases did not fall as much or even went up. This is consistent with the notion that firms need to improve office quality to induce workers to return to the office. In contrast, lower quality office appears to be a more substantially stranded asset, given lower demand, raising questions about whether such assets will ultimately need to be repurposed towards other uses.”