How Remote Work Has Affected Real Estate Values
The remote work boom that was seen during the pandemic has undoubtedly changed how we work in a fundamental way. For instance, a survey conducted in 2021 found that over 75% of workers would gladly sacrifice a pay raise if they could work flexibly more often than before Covid.
Indeed, the recent Workmonitor from HR services provider Randstad found that the current macroeconomic circumstances are not changing employee demands which started during the pandemic: workers still want flexibility, value alignment, and a good work-life balance, with 61% of workers not accepting a job if it impacts work-life balance.
Impact on real estate
As this trend was unfolding there was considerable concern about its potential impact on cities, with people concerned that if we can work from anywhere then we might choose to leave the city and find somewhere cheaper and quieter to live. While I never really thought that was a realistic concern, not least as there is a lot more that draws us to cities than just work, the trend towards more remote work, or hybrid work is having an impact on corporate real estate.
Research from Columbia Business School suggests that the shift to hybrid working has affected not just the commercial real estate market but even the housing market itself, with suburban rents rising alongside house prices in comparison to urban locations.
“The pandemic and its aftershocks have changed the real estate investment landscape both for the short- and for the long-run,” the researcher explains. “One of the pandemic’s longest-lasting impacts will be wider adoption of remote work.”
In a recent article, I explored whether remote working might have an impact on inflation, the Columbia research suggest it could have a similarly significant impact on the equity and debt markets.
They explain that for the entirety of human history there has been an intrinsic connection between the places we live and the places we work. The rise in remote working has severed that relationship, and they believe this will impact not only the real estate market but society more broadly.
The researcher reviewed data from both the three years before the pandemic and the three years from the start of the pandemic until now, while also examining data from both the 20th and 21st centuries to try and understand the possible implications working from home might have on everything from real estate valuations to the structure of cities.
This data included national remote work policies, rent changes in 30 metropolitan areas, the share of remote job postings on the jobs website Indeed, and migration patterns both globally and specifically for New York City.
Drop in usage
The analysis shows that during the pandemic, there was a considerable decline in office usage, which is understandable. What is interesting, however, is that this decline has lasted far longer than was initially expected, and it shows precious little sign of reversing.
The author highlights that pre-Covid, around 250 million square feet of new office leases were signed per year, but this fell to just 100 million in the first half of 2022.
This has had an understandable impact on office values, which fell considerably and remain below 2019. The author believes these valuations will remain below those levels for the next decade.
Simulations of office values, that took into account remote work rates, show that the value of all NYC office properties dropped by more than 40% in 2020. Predictions for 10 years after the shift to working from home suggest that office values in 2029 will remain an average of 39% lower than they were in 2019.
This coincided with a rise in both house prices and rents in the suburbs. The pandemic-induced migration from urban areas led to a significant rise in house prices and rents in suburban areas, while city centers saw the opposite trend with a decrease in prices and rents.
As companies attempt to bring employees back to the office, the real estate market and attitudes toward work are likely to change. It will take more time and data to understand the full impact of the remote work trend on society more broadly and on the real estate sector more specifically. This is a story that still has some way to play out yet.