Remote work erases $453 billion in office real estate value • The Register

The rise in remote work and a drop in demand for office space during the COVID-19 pandemic appears to have wiped out commercial real estate values ​​by an estimated $453 billion. This is not good news for investors and pension funds that depend on the value of these buildings.

The U.S. National Bureau of Economic Research (NBER) — a non-profit, non-governmental organization — has determined this 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 across America between 2000 and 2022 was included in a report this fall.

Before the outbreak of the corona virus, 95 percent of office space in the United States was occupied, according to the bureau. By the end of March 2020, the utilization had dropped to 10 percent, it said. Just a few weeks ago, office occupancy was still just 47 percent, according to NBER.

In the US, this led to a 17.5 percent drop in rental income between January 2020 and May 2022, not only because fewer offices were occupied, but also because the offices rented have shorter lease terms, lower monthly rates, and much less floor space is required as employees are told they can work from home most or all of the week.

Before the pandemic, 253 million square feet were rented per year; As of May 2022, only 59 million square feet were leased, NBER data shows. “This indicates a massive decline in office demand from tenants who are actively making space decisions,” NBER said.

There’s another problem: Not only are vacancy rates at a 30-year high, NBER said 61.7 percent of existing commercial leases have not been offered for renewal since the pandemic. That means commercial rents may not have bottomed yet, NBER said.

However, vacancy rates in Silicon Valley, for example, have recently improved.

Commercial real estate is a popular choice for investors and pension fund managers, but with remote work likely to stay close and office occupancy lower, these investors could run into trouble.

According to NBER, investable commercial real estate assets were approximately $4.7 trillion in 2019, with offices being the largest component. A common way of investing in office real estate is through Commercial Mortgage-Backed Securities (CMBS), which are managed and traded through Commercial Mortgage-Backed Indices (CMBX) composed of pools of CMBS.

According to NBER, newer CMBXs tend to contain a higher percentage of office collateral than earlier vintages. Those newer, office-heavy CMBXs, NBER said, are the ones losing the most money.

As for what to do with abandoned offices, NBER has two suggestions: repurposing older offices into newer “A+” office buildings that haven’t seen nearly as large a rating and occupancy decline; or turn them into residential, multi-family spaces.

Corresponding The San Francisco Standard, office buildings in the city remain vacant due to the excessive costs of building repurposing and repurposing, as well as “market optimism that the return to the office will continue at a gradual pace,” which NBER already seems to be concluding that this probably isn’t the case. ® Remote work erases $453 billion in office real estate value • The Register

Rick Schindler

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