October 8, 2022 / VOLUME NO. 230

Office Valuations Fall

A friend’s company recently built a shiny new office building in Nashville that now sits largely empty. Employees didn’t want to go back to the office this year, and the company didn’t force them to do so.

During the earliest days of the pandemic, physical office occupancy rates fell to just 20% among the 10 largest office markets in the country, according to a report released this week from the National Bureau of Economic Research. It has remained depressed ever since, only gradually creeping back up to 47.5% by mid-September. 

My conversations with bank executives bear that out. They tell me it’s been tough to get workers back in the office. A few months ago, I talked to the chief technology officer of a major regional bank whose official policy is that everyone needs to be in the office full time. When pressed, he admitted not everyone is going along with that. JPMorgan Chase & Co.’s Chairman and CEO Jamie Dimon has emphasized that it’s important for workers to be together in person at least three days per week to collaborate, but news reports suggest that not everyone is complying. Meanwhile, the bank is building a 70-story tall office building in New York City expected to cost $3 billion, with space for 15,000 people. 

“JPMorgan is a major investor in real estate in NYC — having lower occupancy rates is essentially driving down the assets they have as a bank … ” Mike Mayo, bank analyst at Wells Fargo, told the New York Post.

If this trend continues, the consequences for banks and investors who finance office space could be significant. Office tenants normally sign long-term leases. Slightly more than a third of all office leases came up for renewal in 2020 and 2021 combined, according to the bureau’s report. But early evidence suggests that tenants who can make changes are doing so, including getting shorter-lease terms and in some cases, lower rents. Office leasing revenue for 105 office markets throughout the United States fell 17.54 percentage points between January 2020 and May 2022, to $53.90 billion.

As a result, office valuations fell 45% in 2020 and could fall 39% by 2029, the latter representing a $453 billion value destruction, the researchers noted. That could reverberate into the coffers of cities who depend on office complexes for tax revenue.  

Of course, resistance to in-person work could melt in the face of layoffs and a recession that shifts power from workers back to managers. No one knows for sure. In the meantime, so many shiny office buildings remain largely vacant. 

Naomi Snyder, editor-in-chief of Bank Director 

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