Remote work contributing to ‘office real estate apocalypse’

Remote work has been a boon for the IT job market. But it has also savaged commercial real estate value to the point of creating an “office real estate apocalypse,” according to new figures in a working paper from the US National Bureau of Economic Research (NBER).

According to NBER, office occupancy in major markets dropped from 95% in February 2020 to 10% by the end of March 2020—the month the World Health Organization declared Covid-19 a pandemic and the virus continued to spread in the US, sparking a national emergency. That mass flight from the physical office is nowhere near over, with NBER saying office occupancy stood at around 47% in mid-September 2022.

Using CompStak data, NBER estimated overall rent revenue in 105 major US markets fell by 17.54% from January 2020 to May 2022, mostly due to “decreases in the quantity of in-force leases” (companies ditching or not renewing their leases). In the same period, NBER found the sum of square footage per year for newly-signed leases fell from 253.43 million to 59.32 million. Rent for new leases dropped double digits between January 2020 and December 2021 before returning to pre-pandemic levels at the end of 2021.

“This indicates a massive drop in office demand from tenants who are actively making space decisions,” the NBER researchers wrote. They also reported a “significantly negative relationship” between increased postings for remote jobs and office demand, indicating “durable shifts” in worker preference for remote jobs are driving the shift.

“Rents may not have bottomed out yet,” NBER concluded, citing the large number of leases that were in effect at the start of the pandemic that may never be renewed and sky-high vacancy rates in metro areas like New York. Currently, NBER estimates the total valuation of NYC offices to be nearly 45% lower by the end of 2020 than they were in 2019. The researchers predicted that by 2029 that figure could improve to around 39% below 2019 values or plummet to around 60% below, depending on how many businesses stick to work-from-home models.

A separate survey from Partnership for New York City found just 49% of Manhattan office workers are reporting to the office on any given workday, with just 9% being there every day of the week.

Whether in the office or not, IT departments will likely find themselves with more money in their bank account. The 2023 State of IT Report by Spiceworks Ziff Davis recently found 51% of polled IT departments will continue to increase budgets in 2023, and a recent Gartner survey found tech spending is low on many executives’ chopping blocks in the event of a recession. However, many IT jobs could be at risk of outsourcing if companies decide that jobs that can be done from home can really be done from anywhere.—TM

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