According to a recent study by the NYU Stern School of Business and Columbia Business School, remote work trends are expected to negatively impact office values in New York City by as much as 39% by 2029 – a $453 billion decrease in the value of New York City office buildings. Similar declines are likely to occur in other U.S. cities.
In what the authors refer to as an “office real estate apocalypse,” this decline will also have detrimental effects on neighboring businesses and the local economy.
As the COVID-19 pandemic drove the trend toward remote work, ongoing demand for office space has declined significantly. Physical occupancy in key U.S. office markets decreased from 95% in February 2020 to around 47% last month, and it looks like this trend is here to stay.
The study focused on office REITs in New York City. It states that, “office REIT investors believe remote-work practice to be long-lasting.” Several US businesses have declared permanent remote or hybrid work arrangements and others have begun to reduce their physical commercial occupancy footprint, which is having significant effects on the local budgets.
In 2020, 53% of New York City's budget was comprised of real estate taxes, 24% of which came from office and retail property taxes. To keep a balanced budget, a decline in office and retail property values would require either an increase in tax rates or a reduction in government spending.
On the other hand, the work-from-home movement should generate new building and remodeling initiatives in office conversions. Converting class-B or class-C office buildings into class-A residential would support their values and serve to fill a lack of affordable housing options in large cities.