A recent study by NYU professor Arpit Gupta and his colleagues predicted an “office real estate apocalypse” as research points to a 39% decline in office values, in the long run, representing a “$453 billion value destruction”.
Using New York City data, the research estimated “a 45% decline in office values in 2020 and 39% in the longer run, the latter representing a $453 billion value deduction,” which could plunge the city into a “fiscal doom loop.” Similar damage could hit other cities and by extension the national economy.
How do we make sense of the available data? CommercialEdge’s monthly National Office Report for September found that average office listing rates stagnated at $38.70 per square foot, down only 0.1% year-over-year. Bad, but not apocalyptic. Some cities have strong rental markets, especially in the Sun Belt or regions with strong life sciences industries.
But it’s possible these real estate investors are adding a positive spin to the numbers. In contrast, consider the “apocalypse” analysis from NYU and Columbia professors. The research combined working from home data with financial information from real estate investment trusts (REITs), plus other financial information, and predicted, “long-run office valuations that are 39.18% below pre-pandemic levels” with “lower quality office stock…a more substantially stranded asset.”
Based on this study, cities—and the economy—are in for a rough ride. Although some older buildings might be converted into housing, that’s not an easy or immediate process. Collapsing real estate values could lead to substantial fiscal problems for many cities, resulting in cuts to social services, education, public health, and other essential government functions. We are not in a commercial real estate apocalypse yet, but we all need to keep one eye on the danger.
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