That is the conclusion of a team of economists from NYU Stern Business School, Columbia Business School and the National Bureau of Economic Research.
Many employees who worked from home during the pandemic haven’t returned — at least not full time. In 2020, office occupancy fell from nearly 90% to 10%. But it’s only bounced back to 48.4% in New York.
In response, fewer companies are renewing their leases, which lowers the value of office buildings.
The number of newly signed lease, meanwhile, fell from 285.4 million feet per year before the pandemic to only 62.4 million feet per year in the same period after.
The researchers developed a valuation model that tells us how much these properties will be worth in six years’ time — a level of destruction that would make the Four Horsemen blush.
Already between December 2019 and December 2022, the economists show, lease revenue fell 18.5% in inflation-adjusted terms.
Lower values means less tax revenue. In the case of New York, the paper predicts a 6.5% drop by 2029. To plug the hole, cities will raise taxes and fees in other ways — making the city less attractive to live in, which means even less revenue.
Offices becoming ghost towns
The study’s authors highlight that vacancy rates are at 30-year highs in many American cities — New York’s vacancy rate is an eye watering 22.2% in 2023’s first quarter.
- During the COVID pandemic, about 70% of college-educated workers did some or all of their work from home.
- In NYC, physical office occupancy rates fell to just 10%.
- Today, the occupancy rate is 48.4% in New York.
- If these offices aren’t full, companies will not renew leases. Already the contractual occupancy rate in Manhattan is at a 30-year low of 77.8% in the fourth quarter of 2022.
- But a number of commercial leases will come up for renewal in the next two years, meaning there could be an even greater collapse.
- In 2021, property taxes accounted for 48% of NYC’s budget, 31% of which comes from office and retail property taxes.
The researchers conclude that a 43.9% decline in property values would result in a 6.5% reduction in overall tax revenues.
If we assume work-from-home is never-ending and a permanent feature of life, the picture gets even worse. The researchers estimate this would result in a decline in office values of around 51.6% by 2029. The situation is not quite as bad for the top-tier properties, but even these are expected to fall 15.3% to 19.7% depending on whether work-from-home is forever.
The office valuation apocalypse
What does this mean for office property values overall? They get absolutely nuked.
The economists estimate the value of office stock in New York City has fallen by around $69.6 billion by the end of 2022. Owners of commercial property can only play ostrich and bury their heads in the sand for so long. At some point they will have to eat these losses.
Looking down the list, all urban America looks like it is going deeply in the red. The authors calculate that nationwide the United States will see a $506.3 billion decline in commercial property values. That puts losses at just over half a trillion dollars!
Urban America deeply in the red
Just when you thought it couldn’t get any worse, it gets worse.
The economists point out that cities rely on property-tax revenues for much of their budget. New York City’s budget is currently around $107 billion, and around $35 billion of that comes from property. San Francisco’s much smaller budget of $6.2 billion also relies heavily on real estate, with around $2 billion coming from property taxes.
The researchers estimate it would reduce tax revenues by around 6.5% in New York City.
Services are cut. Taxes across the board go up. And more people flee as the city becomes even more uninviting.