Remote Work Wipes $453b Off Office Real Estate

The surge in remote work, and a decline in demand for office space, during the COVID-19 pandemic has apparently wiped an estimated $453 billion off commercial real-estate value. That's not good news for investors and pension funds relying on the value of these buildings.

The US National Bureau of Economic Research (NBER) – a nonprofit, non-government org – came up with the figure, and is predicting what it calls an "office real estate apocalypse." While it focused its work on New York City, data from 105 office markets throughout America between 2000 and 2022 was included in a report this fall.

Prior to the coronavirus outbreak, 95 percent of office space was occupied in the US, according to the bureau. By the end of March 2020, occupancy dropped to 10 percent, it said. As of only a couple weeks ago, the NBER said office occupancy is still only at 47 percent. 

Around the US, that resulted in a 17.5 percent decrease in lease revenue between January 2020, and May 2022, and not only because fewer offices were being occupied, but also because those that are being rented are going for shorter terms, lower prices per month, and a lot less floor space is needed as staff are told they can work from home for most or all the week.

Prior to the pandemic, 253 million square feet were rented per year; as of May 2022, just 59 million square feet had been rented, NBER's data indicates. "This indicates a massive drop in office demand from tenants who are actively making space decisions," NBER said.

There's another problem: vacancy rates are not only at a 30-year high, NBER said 61.7 percent of in-force commercial leases haven't come up for renewal since the pandemic. What that means is that commercial "rents may not have bottomed out yet," NBER said. 

That said, vacancy rates in, say, Silicon Valley have been improving lately.

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Commercial real estate is a popular choice for investors and pension fund managers, but with remote work likely to hang around, and office occupancy lower, those investors may be in trouble. 

According to NBER, investable commercial real estate assets totaled around $4.7 trillion in 2019, with offices the largest component. A common method used to invest in office real estate is commercial mortgage-backed securities (CMBS), which are managed and traded via commercial mortgage-backed indexes (CMBX) made up of pools of CMBSes. 

According to NBER, more recent CMBXes tend to include a higher percentage of office collateral than earlier vintages. Those newer, office-heavy CMBXes, NBER said, are what's losing the most money.

As for what to do with abandoned offices, which NBER has two suggestions: repurpose older offices into newer "A+" office buildings, which haven't seen nearly as large a valuation and occupancy drop; or turn them into residential, multi-family spaces.

According to The San Francisco Standard, office buildings in the city remain empty due to the excessive costs of repurposing and rezoning buildings, as well as "market optimism that the return to office will continue at a gradual pace," something NBER seems to have already concluded is unlikely to be the case. ®