In this article we discuss how the perpetuation of pandemic-driven remote working is impacting demand for office space, increasing vacancy rates and weighing on investors, owners and lenders.
It appears that the hybrid workforce is here to stay, leaving the future of traditional office space largely unknown. As return-to-office policies continue to evolve, an increasing number of companies are either embracing or adjusting to, the reality that accommodating some level of remote workforce is now an inevitability.
When workers packed up their laptops and work documents, and walked out of their offices in March of 2020 in compliance with U.S. stay at home mandates, few employer/tenants, landlords or lenders could have imagined what would ensue. The state of the workforce today isn’t merely a function of employees not wanting to return to an office environment on either a full or part time basis. In more cases than one might imagine, companies are coming to realize that they can, in fact, operate effectively and with great efficiency under some level of remote worker scenario. Collectively, these businesses occupy tens of millions of square feet of office space in some of the nation’s most historically valuable urban real estate markets.
Regardless of their motivation, as more companies embrace or acquiesce to the reality of remote work, companies have started to shrink their physical footprint and demand for office space simply is not meeting supply. As a result, that supply surged from the start of the COVID pandemic to a 2022 Q3 national vacancy rate of 19.1%. This lower demand for office space is leading to widespread concerns that office buildings could become a less valuable asset class, which has significant implications for owners, lenders and institutional investors. Further, the concentration of office assets in urban areas poses potential fiscal challenges for local governments, which rely heavily on property taxes levied on commercial offices and related retail spaces.
For example, the New York City office market has been significantly impacted by the remote work trend, with debt repayment coming due and rising interest rates causing stress for the office asset class:
- In 2022 Q3, the overall office space vacancy rate in Manhattan was 15.4%.
- Inflation, recession concerns, geopolitical complexities, and other factors continue to weigh on the potential for robust return to the office.
- With lease revenue and total number of leases declining, office values in New York City are now expected to drop 28% by 2029 – representing value destruction of $49 billion – according to a new study conducted by academics at New York University and Columbia University.
Extrapolating the NYU/Columbia study, titled “Work From Home and the Office Real Estate Apocalypse” to the national office market, the report estimates that about $500 billion in office asset value could vanish by 2029 as the same dynamic plays out in areas where remote workers spend more time outside centralized office spaces.