Work-from-home tactics have changed the landscape
The long-term impact of remote work is doing a number on New York office values, now expected to lose more than 40% of their pre-pandemic value by 2029, researchers warned.
The teams at New York University and Columbia University recently concluded that values look increasingly more dire than previously believed because of a return-to-office plateauing at about 50% occupancy, according to the report.
Ominously titled “Work From Home and the Office Real Estate Apocalypse,” by NYU’s Arpit Gupta and Columbia University’s Vrinda Mittal and Stijn Van Nieuwerburgh, the study found that by 2029, the city’s office stock will have dropped in value by 28% -- that’s $49 billion worth.
Hedging his bets with both sectors
Moe Ashor (pictured below), a mortgage broker with Edge Home Finance Corp., is well aware of the sector’s woes. He’s one of those rare brokers who does both residential and commercial – which is a neat trick now in hedging one’s bets.
“It’s getting pretty bad out there in the commercial space,” he told Mortgage Professional America during a recent interview. “Retail space is still holding to a certain extent. It really is the office space that’s being killed.”
He liked that the Fed paused on interest rates this week, but noted the holding pattern remains. “Stopping the hiking of rates is helpful,” he said. “When rates actually start coming down is when we’ll see the greatest benefits.”
COVID-19 changed everything
Erin Sykes (pictured top), chief economist and real estate wealth advisor at Nest Seekers Internationale, is struck by the rapid descent. “We’ve really faced some unprecedented times in the last three years,” she said. Yet in the next breath she acknowledged it wasn’t completely unexpected given the pandemic.
“That was so disrupted by the Zoom culture that really emerged in the last couple of years, and I think a lot of those building owners and companies were late to call their employees back to the office full time and, as a result, they have created a situation that is very challenging to resolve. Because the longer that people work from home and had all that added flexibility, the more accustomed they got to it and the less likely they would change their lifestyle.”
Bottom line: “Had we really focused on this return to office earlier, we would not be in such a crisis moment for commercial real estate.”
According to New York University/Columbia University researchers, the market is suffering from the remnants of the pandemic.
“The COVID-19 pandemic led to drastic changes in where people work,” researchers wrote. “Physical office occupancy in the major office markets of the US fell to 10% of pre-pandemic levels at the end of March 2020, and has remained depressed ever since – creeping back to 50% by May 2023.”
In the intervening period, work-from-home practices have become more established, and many firms have unrolled permanent remote or hybrid work arrangements and
shrinking physical footprints, according to the findings.
“These shifts in current and projected future office demand have led to concerns that commercial office buildings may become a stranded asset in the wake of disruptions resulting from remote work,” researchers wrote. “Because office assets are often financed with debt which resides on banks’ balance sheets and in commercial mortgage-backed security (CMBS) portfolios, large declines in value would have consequences for institutional investors and for financial stability.”
Such spatial concentration of office assets in urban central business districts also poses fiscal challenges for local governments, which rely heavily on property taxes levied on commercial real estate to provide public goods and services., researchers continued.
“A decline in office and adjacent retail real estate valuations may activate a fiscal ‘urban doom loop’ that lowers the quality of life for urban residents and worsens the business climate,” researchers noted.
Given such scenarios, has Ashor pivoted to the single-family home market? “To be honest, because the market is tough on both ends, I’m focusing on both ends,” he said. “When the commercial market was doing great and residential was doing great, I was leaning toward the commercial market just because commercial lending is so much easier to pull off than residential lending.”
But now he’s in the realm of the unknown – and not taking any chances: “Now that both are in a pretty bad spot, I’m pretty much fifty-fifty.”
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