According to a new report from the Mortgage Bankers Association, the value of offices in the United States could fall by 10 to 20% in the coming years in the probable event that the corporate world settles into a hybrid office environment. and work.
But the decline is unlikely to happen all at once, according to the report, thanks to the long-term nature of office leases leading to a more gradual reduction in office space occupied by companies.
“It’s going to settle over a decade,” said report co-author Jamie Woodwell, vice president of commercial real estate research at the MBA. “This is a slower, longer-term adjustment than what you would see in other property types, like what we saw with hospitality and retail early in the pandemic. “
That outlook may offer some relief to the banking sector, where executives have spent two years monitoring the health of their office-related commercial property loans as companies debate the future of work.
The industry itself is grappling with these same questions. Synchrony Financial in Stamford, Connecticut, is offering its employees the option of permanent remote working, while some Wall Street banks are pushing for a return to in-person work and others are measuring where they will fall on this spectrum.
The MBA report looked at two possible scenarios for office values based on the evolution of the future of work, noting that the future likely lies somewhere in between.
One scenario would assume that employees and employers see far more advantages than disadvantages of working in the office, such as greater collaboration and a greater likelihood of meeting higher levels, which can help employees land promotions. .
In this scenario, employees would spend three or more days a week in the office, employers would use roughly the same amount of space, and office values would hover around pre-pandemic levels – but not before seeing a some volatility.
But the most likely base-case scenario assumes that companies would opt for a remote or hybrid model and that employees would come into the office two or three days a week.
Companies would use about 80% of office space compared to pre-pandemic levels, and the values of different properties would vary depending on their location and type of property. Offices with “premium” space for collaboration, for example, would be more valuable than lesser quality spaces.
But the amount of long-term office leases going on today means the buildings won’t be “empty overnight”, said Matthew Anderson, managing director of commercial mortgage analytics firm Trepp.
“There may not be a watershed moment where everyone completely abandons their duties, and it goes from being problematic to a real problem,” Anderson said. “More likely it will continue to be a slow leak, some kind of neglected sector.”
Right now, Anderson said, banks are “still making loans to offices” but issuing less of them, due to lower demand from businesses, but also tighter underwriting criteria that keep them away from bigger projects. risky.
Executives at Valley National Bancorp, for example, said in April that they did not have a large exposure to office properties but remained cautious on the sector.
“We’re very mindful of what’s going on in the office and very careful about how we do it,” Valley Chairman Thomas Iadanza said during New York’s bank’s first-quarter earnings call. York.
PNC Financial Services CEO William Demchak, meanwhile, told analysts in July that the bank was concerned about the “slow burn” the office sector is experiencing but that the Pittsburgh bank was “really well reserved” on the face of it. to a negative scenario.
To assess potential scenarios, the MBA report looked at the real estate crash that hit San Francisco after the dotcom bubble. But the authors also warned that many tech companies declared bankruptcy at the time and canceled their leases, despite the pandemic not prompting a similar wave of meltdowns.
“Any readjustments to office leases resulting from changes in work-from-home or other demand will span a decade, as opposed to the three years seen in San Francisco in 2001,” the report said.
Allissa Kline contributed to this article.