HomeNewsletterReport: office property values could drop 50% if WFH remains

Report: office property values could drop 50% if WFH remains

Remote work is one trend that employers, workers and commercial real estate owners all had to adjust to during the COVID-19 pandemic. Now, there’s a question of what type of impact working from home will have on the previously mentioned groups after the pandemic has subsided.

One thing that’s certain is that employers and workers both have thoughts and opinions on working from home before and after the pandemic. Surveys have been done to varying results—smart building SaaS company Cohesion’s recent Voice of the Employee survey revealed that almost a quarter of its 1,000 respondents would be comfortable coming back to their office right away. Meanwhile, JLL’s Shaping Human Experience study showed that more than half of its respondents would favor some sort of hybrid work model.

Employers’ opinions on the topic are all over the map, too. Some companies like Twitter implemented a permanent work from home policy, while Goldman Sachs is ready to get back to normal.

WFH’s impact on CRE

While employees and workers can speculate about what remote work will look like for them in the future, there’s data for what it could mean for CRE, GlobeSt.com reports. According to Fitch Ratings, office space demand could decline permanently if remote work continues after the COVID-19 pandemic. The credit rating agency ran a number of stress scenarios to see how remote work would impact demand, rent and net class flow on 2012-2020 vintage office commercial mortgage-backed security (CMBS) transactions.

Fitch’s “WFH Secular Shift Will Pressure U.S. Office Properties” showed that moderate and severe stress situations resulted in just 4.4% and zero percent of 114 CMBS office single-asset/single borrower bonds keeping their current ratings, respectively.

The moderate stress scenario is based on an assumption that employees will work from home 1.5 days a week. This would lead to a 20% decline in office workers and a 10% demand for office space. Those numbers doubled in Fitch’s severe scenario, GlobeSt.com reports. Rent would decrease by 1.25 times the reduction in space. This could lead to more vacancies and lower rent levels.

Meanwhile, net cash flow could drop 15% (moderate stress) scenario and 30% (severe). Fitch’s current rating analysis also saw property values decrease by 38% on average. There’s not much difference between that drop and what the CRE industry saw for office value during the 2008 Great Recession (43%). If the work from home trend grows, it might take longer for office property value to recover after the COVID-19 recession.

Of course, these numbers are somewhat speculative and rely on whether or not workers return to their offices. The aforementioned surveys show that there’s at least some employee interest in coming back to the physical office. However, Cushman & Wakefield CEO Brett White said the number of teleworkers could double from 5% to 10% on a recent CNBC “Squawk on the Street” appearance.
While an extra 30% of office workers were permitted to telework once or twice a week, White said he believes the figure could increase 50% to 60% after the COVID-19 pandemic. Plus only a little more than half of the three million employees who lost their jobs last March and April have been rehired. The executive projected companies with flexible workforces could decrease their real estate footprint by as much as 30%.

“A lot of employers should and will think of creative ways to use their space more efficiently,” White said. “And that’s going to be a drag on occupancy.”

Joe Dyton can be reached at joed@fifthgenmedia.com.

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