The future of commercial real estate, particularly office spaces, appears bleak. Recent forecasts by researchers from New York University and Columbia University predict a staggering 44% decline in office values in New York City by 2029. This revised projection is much more significant than their previous estimate of a 28% drop by the same year.
The combination of the persistent trend of remote work and the sudden spike in interest rates coinciding with the maturity of many commercial real estate loans is the primary cause of this pessimistic outlook. Tesla CEO Elon Musk suggests that the downturn in property values will not be limited to commercial real estate but will extend to the residential housing market as well. In a tweet, he hinted at impending pain for home values, following the rapid decline in commercial real estate.
However, the decline in demand for commercial real estate is actually driving the demand for residential real estate. With more people working remotely, there is a greater need for space at home. While sales volume may be down due to reduced inventory, home prices have increased for two consecutive months.
Musk did not specify the extent to which he believes U.S. home prices will fall, nor did he provide an explanation for his statement. Redfin CEO Glenn Kelman responded to Musk’s tweet, highlighting that the drop in demand for commercial real estate is driving the demand for residential properties, as people require more space for remote work. He also noted that the current decrease in sales volume is a result of limited inventory.
Research conducted by the Federal Reserve Bank of San Francisco last year supports the idea that remote work has contributed to the surge in home prices during the pandemic. According to the study, up to 50% of the increase in housing prices during the pandemic can be attributed to the heightened demand for larger living spaces caused by the shift to remote work. The researchers concluded that this shift in remote work could have a significant impact on future housing costs and inflation.
The opinions of Kelman and Musk have sparked a division within the industry. While national home prices have experienced a slight decline of 2.2% since June 2022, as indicated by the seasonally adjusted Case-Shiller National Home Price Index, there is no widespread crash in prices. Some markets, such as San Francisco (down 12.9% from its peak in 2022), Phoenix (down 8.4%), and Las Vegas (down 9.0%), have witnessed significant drops. However, many areas in the Midwest, like Chicago, and along the East Coast, like Miami, are still near their all-time highs.
Economists at firms like Zillow and CoreLogic believe that national home prices have hit their bottom, while analysts at Moody’s Analytics and Fannie Mae anticipate that national home prices, which experienced month-over-month growth in February and March according to Case-Shiller, will soon experience a correction.