The shift to remote work, accelerated by the pandemic, is having profound effects on the real estate industry and the economy at large. With many office spaces empty, real estate companies face challenges, leading to defaults on loans and plummeting property values.
Columbia Business School Real estate professor Stijn Van Nieuwerburgh has modeled out the impact of hybrid work on pricing. He calls it a "train wreck in slow motion."
"And this is just the beginning. And the reason it's just the beginning is because there's a lot of office tenants that have not had to make an active space decision yet," Van Nieuwerburgh said. "'Do I want to renew this space? Do I want to vacate? Maybe I sign a new lease for half as much space.' This is what tenants have been doing for the last three years."
The remote and hybrid work trends have resulted in historically low office occupancy rates, causing some buildings to become obsolete. The price of office buildings has reportedly dropped by up to 40%. Refinancing office loans, a common practice, is no longer guaranteed, especially as interest rates rise. The expiration of $1.5 trillion in commercial real estate loans within the next two years adds to the complexity. The potential crisis extends to banks, particularly smaller and regional ones with substantial exposure to commercial real estate loans.
Commercial real estate plays a huge role in the typical bank's business, according to Van Nieuwerburgh.
"And I'm talking mostly about these smaller and medium size, maybe regional banks," Van Nieuwerburgh said. "They have a lot of exposure. That is their bread-and-butter activity. About 30% of all their loans are commercial real estate loans."
Van Nieuwerburgh sees it as a potential crisis.
Efforts to revitalize empty office buildings include converting them into apartments, but zoning restrictions limit such initiatives. The reimagining of office space is seen as crucial, requiring a combination of public and private resources and innovative ideas to address the evolving nature of work and living.
For Van Nieuwerburgh, the reimagining of office space can, and should be ambitious, combining public and private money and ideas for what to do with old office space.
"We no longer have to live where we work," Van Nieuwerburg said. "And that's a very transformational idea. And I believe society is only at the beginning of realizing the full potential of that idea."