In a paper published last year, researchers from New York University and Columbia University estimated a 28% decline in New York City office values by 2029, totaling to a $49 billion loss. And in their model, that equates to a $500 billion “value destruction,” nationwide. The researchers—Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh—revised their estimate this month in the latest version of their paper, titled: “Work From Home and the Office Real Estate Apocalypse.” They now see a 44% decline in New York City office values by 2029, and a nationwide value destruction, as they put it, of $506 billion in just a three-year period from 2019 to 2022.

The reason behind their revised, yet bleaker assessment?

In their paper, the authors argue that remote work has led to significant drops in lease revenue, occupancy, lease renewal rates, and market rents in the office sector within commercial real estate. All of which has affected cash flow, at a time when the Federal Reserve has aggressively raised interest rates. Although, interestingly enough, they found that lower quality office properties were more susceptible to the shocks listed above, and were at a greater risk of becoming a “stranded asset,” they wrote. Still there is an underlying uncertainty in their model, which they note, the future of remote work.

In studying lease level data for more than 100 office markets in the U.S., the authors found an 18.51% decrease in lease revenue between December 2019 and December 2020, just months following the start of the pandemic. The quantity of newly signed leases by square footage and rents of newly signed leases also fell in that same period. All the while, vacancy rates in several major markets are at record-highs, the authors wrote, pointing to New York City, which has an office vacancy rate of more than 20% as of the first quarter of this year. Additionally, the authors said they’ve found a “direct connection” between companies’ remote work policies and reductions in their actual leased office space. 

“The key takeaway from our analysis is that remote work is shaping up to massively disrupt the value of commercial office real estate in the short and medium term,” the authors wrote. 

Still, the effects are not uniform across the country or across properties. The authors found that higher quality buildings, a.k.a. buildings with higher rents that were built more recently, “appear to be faring better,” which they claim is consistent with the notion that companies have to improve office quality for workers to want to come back. Additionally, they found that cities with greater work from home exposure are seeing larger declines in office demand, which is clearly shown in these two examples. In looking at San Francisco and Charlotte, they found the former’s office sector experienced greater declines, which is to be expected as San Francisco’s office properties have been hit particularly hard with the shift to remote work. Still, both markets did see declines in their office valuations.  

“We calculate a reduction in value of the office stock between the end of 2019 and 2022 of $69.6 billion for NYC, $32.7 billion for San Francisco, and $5.1 billion for Charlotte,” authors wrote. “For the remaining office markets, we combine market-specific lease revenue declines with valuation ratio changes for NYC to compute the value decline. Nationwide, we find a $506.3 billion decline in office values in the three-year period.” 

The greatest declines in property values by dollar losses over that three-year period were seen in New York City, San Francisco, Los Angeles, San Jose, and Boston—which the authors say could affect local governments that rely heavily on property taxes, triggering an “urban doom loop.”