The researchers who last year predicted $500B in value would be wiped from office buildings nationwide because of remote work gave a chilling update for real estate investors this week: They underestimated the damage.

Bisnow/Miriam Hall

The view of Midtown from Brookfield’s One Manhattan West

Academics from New York University and Columbia University published a report last summer predicting that New York City office values would drop 28% by 2029, representing value destruction of $49B. In an update released this month, the authors now project an average value drop of 43.9% from 2019 to 2029.

In just a three-year period between 2019 and 2022, office buildings nationally have lost roughly $506.3B in value, according to the researchers. Office buildings lost $69.6B in New York, $32.7B in San Francisco and $5.1B for Charlotte, they wrote.

“The primary reason for the change is that we now estimate a more persistent work from home regime than before,” Arpit Gupta, an associate professor of finance at New York University’s Stern School of Business and one of the co-authors of the report, wrote in an email. “We also show estimates for the work from home rates across cities, many other cities in the country feature less remote work than New York City.”

While apartment rents in the city have climbed to record highs as the city recovers its residents, office usage has failed to follow suit. Office occupancy in New York remains below 50%, according to Kastle Systems data, and landlords are feeling the pain as a result.

SL Green, the city’s largest office landlord, is facing a credit downgrade, while Vornado has said it will stop paying dividends to owners of its common shares for the rest of 2023 as it seeks to shore up its finances.

Large employers like JPMorgan Chase and Amazon have in recent months put in place return-to-office mandates, and a recent CBRE U.S. office occupiers survey found 65% of the companies now require employees to return to the office at least some of the time.

But that has not affected investors’ views, with the biggest publicly traded office landlords experiencing significant slides in their stock prices and an increase in short sellers.

“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 in the report. “This conclusion is consistent with our finding that firms appear to demand substantially less office space when they adopt hybrid and remote work practices, and that such practices appear to be persistent.”

The coronavirus pandemic created a work-from-home revolution that may lead to a decline in tax revenues from commercial properties, and cities will suffer as they cannot provide important services to residents, a new report warns.

If current trends persist, demand for commercial real estate space could drop by 12% to 25% in key cities, leading to a correlated drop in assessed values, and thus in city property tax revenue. The full effects haven’t yet been felt because federal funding from the American Rescue Plan has so far cushioned the blow, but city leaders should prepare.

That’s the takeaway from a new report titled “Impact of Work From Home on Commercial Property Values and the Property Tax in U.S. Cities,” commissioned by the Communications Workers of America.

The pandemic could result in empty workspaces.

The report was authored by researchers from the City University of New York and the University of Illinois at Chicago and released Thursday by the Institute on Taxation and Economic Policy.

“Though magnitudes vary somewhat across cities, all face significant fiscal risks,” the report says.

Researchers focused on eight cities — Atlanta, Austin, Charlotte, Chicago, Los Angeles, Miami, New York and San Francisco — where commercial real estate accounts for an average of 37% of property taxes, ranging from 26% in LA to 56% in Atlanta. A high proportion of white-collar jobs in these places can be performed out of offices and have a ripple effect on the economy.

Using data from the Bureau of Labor Statistics Quarterly Census of Employment and Wages, the researchers tracked employment changes in 2020 by city and industry. Even with no change in space per worker, employment effects alone will cause the value of commercial real estate to fall by an average of 6% — from 1% in Austin to 13% in San Francisco — they found. With two days or less of work-from-home, that number rises to 12%, and three or more days of work-from-home, it’s 25%.

The report found that New York and San Francisco are the most vulnerable of the eight cities, with predicted commercial price drops ranging from 25% to 43%.

“Declines are smaller, but still significant, in the other cities,” the report says. 

Using a special database on city finance, the researchers translated the decline in CRE property values into effects on property tax and city revenues. Larger cities with diversified revenue structures won’t feel as much impact, but smaller cities like Austin and Miami, which are more dependent on property tax, will have to adjust.

The analysis found that Atlanta will have the largest revenue effect, with an estimated 5.7% loss. Austin, New York and San Francisco face revenue losses between 2% and 4%.

Cities and states have gotten fiscal relief this year under the federal American Rescue Plan, but those funds will phase out between 2022 and 2024. The report’s authors say that one future solution may be to divert funds away from suburbs to city centers most affected — but warn that any reallocation is likely to draw “furious resistance” from jurisdictions that would be the perceived losers in any such shift.

The authors said there’s a “paradox” in cases like Florida and Texas. Political leaders tout low taxes and no income tax, but those states will soon see economic detriment in their major cities as they face negative impacts from the increase in working from home.

Some leaders have long predicted these problems. In Texas, lower taxes, light regulation and cheap housing lured 4.2 million people and hundreds of corporations in the past decade, but left little revenues for infrastructure improvements and social services — deficiencies that were evident during a winter storm and a massive power outage last winter.

“We are not sufficiently looking down the road. And we’re not sufficiently investing,” former Houston Mayor Annise Parker, who led the city from 2010 to 2016, told Bisnow in February.

“The bill will come due,” University of Houston Political Science professor Brandon Rottinghaus told Bisnow.