As distinct as our digital and our physical worlds may seem, their inextricable connectedness has become impossible to ignore. If this wasn’t clear before the pandemic, it certainly is now: Technology and digitalization have transformed the way we work, live, and consume—and now, the cities where so many of us do these things must change, too.
At a recent panel discussion hosted by Columbia Business School’s Digital Future Initiative and the Paul Milstein Center for Real Estate, experts from academia, industry, and government considered the ways in which the sharp shift toward remote and hybrid work is impacting commercial real estate and reshaping the future of cities.
Moderator Stephan Meier, the James P. Gorman Professor of Business at CBS, guided the panelists in a conversation that covered the unprecedented scope of the change we’re currently witnessing; coming challenges to real estate, along with their broad relevance; and the actions city leaders are taking to try to wrest a potential crisis into an opportunity to evolve—especially in New York City.
Their discussion included four key takeaways:
1. ‘We are living in the middle of a remarkable transformation.’
Panelist Stijn Van Nieuwerburgh, the Earle W. Kazis and Benjamin Schore Professor of Real Estate and professor of finance at CBS, kicked off the discussion by establishing just how seminal the current moment is: “We are living in the middle of a remarkable transformation, really a revolution,” he said. Divorcing our places of work from our places of residence is a brand-new concept—given that humans have always needed to live reasonably close to where they forage, farm, or clock in—and it’ll likely take decades to grapple with all of the ways in which this separation will ripple through our society, he noted.
“This is a mind-blowing idea, and one that I think is going to have important repercussions for real estate and urban structure,” Van Nieuwerburgh said.
His recent research helps quantify the scope of this disruption with striking numbers: For one thing, Manhattan has lost 200,000 residents since March 2020, the most of any county in the United States.
He has also documented that, over a similar period, the office real estate market in New York has sustained a massive blow—likely with the worst yet to come. Leasing revenue from existing office buildings has already fallen by 20 percent, and only about one-third of the leases outstanding in December 2019, just before the pandemic descended, have come up for renewal since then. “What that means is that, as bad as the drop in leasing revenue has already been, the second shoe is yet to fall because there are all of these leases that are still outstanding,” Van Nieuwerburgh said.
When new leases do roll around for renewal, demand will be down sharply: Van Nieuwerburgh estimates that new office leasing activity has dropped 50 to 80 percent in cities across the United States. (He puts the number at 54 percent in New York and close to 70 percent in San Francisco.)
Overall, what do these trends imply for the value of office real estate assets? Van Nieuwerburgh’s research suggests that, in aggregate, the value of all offices in New York City has dropped by a whopping 40 percent.
2. Expect wide-ranging impacts.
Julie Stein, executive director of the governor- and mayor-convened “New” New York Panel, launched to plan for the future of New York’s economy, emphasized that the consequences of the trends laid out by Van Nieuwerburgh will hardly be isolated to real estate owners and inhabitants. After all, if fewer companies and workers are reliant on office buildings, then the whole commercial ecosystems that have long existed to support them—the restaurants, retail, and other businesses that constitute cities’ business districts—are also in peril.
Local governments have long been heavily reliant on the tax revenue generated by these business districts, Stein pointed out.
“Even if you don’t work in Midtown, you need to care about what’s happening there because your library, your senior center, your education, your roads—all that stuff—is funded by this center of global commerce that’s happening in Midtown,” Stein said.
Van Nieuwerburgh pointed to another constituency that could feel the pain of the shrinking value of commercial real estate: institutional investors and all the underlying investors who rely on them, including pension-holders. The average institution allocates about 10 percent of its portfolio to commercial real estate, he said, and a lot of that is in office holdings.
3. Cities have an opportunity: Evolve to meet the moment.
Though the panelists’ conversation included plenty of gloomy forecasts, it also offered reason for optimism. Nicholas Bienstock ’96, managing partner of real estate investment firm Savanna, said while he has experienced many ups and downs over his career in New York’s real estate industry, “New York does have a remarkable capacity across multiple crises of different types to recover.”
Ultimately, he said, even companies that lean into hybrid work setups will continue to want to have offices in places where they can draw on big talent pools, and New York and other major metropolitan areas in the United States can continue to offer those—as long as they remain places where people genuinely want to live.
One of the guiding aims of the “New” New York Panel, Stein said, is to recognize and act on a recent paradigm shift: In the world of remote work, people will no longer simply move to where the businesses are; businesses will need to move to where people want to be.
“In this world where people can vote with their feet, we really need to answer the question, ‘Why should they work here?’ which led us to the conclusion that we needed to make New York the best place to work, no matter what you do or where you work,” Stein said. “And to do that, you really need to make New York the best place, period.”
The “New” New York Panel was formed in mid-2022, when Governor Kathy Hochul and Mayor Eric Adams brought together 59 civic leaders and industry experts to develop a plan for boosting the economic resilience of the city and the wider region. Six months later, the mayor and governor adopted the panel’s 40-point plan, which includes legislative, budgetary, and agency actions on the city, state, and federal levels.
Stein explained the plan’s 40 points were organized under three central goals: 1) reimagining the city’s business districts as vibrant, 24/7 districts where people want to live, work, and play; 2) acknowledging that the future of work is hybrid, making it easier for people to commute into Manhattan and developing employment hubs throughout the city so people can easily work from any of the five boroughs; and 3) generating inclusive, future-focused growth, which must address the city’s affordable-housing crisis, among other issues.
In providing examples of how the city government can help facilitate the realization of these big goals, Stein highlighted the possibility of converting office spaces into residential spaces, a hot topic of late, she said.
“We want to make sure that when it makes sense—and where it makes sense—the rules are out of the way so we can convert outdated office space to residential use, to both soak up some of that excess vacancy but also bring more foot traffic into these business districts,” Stein said.
Bienstock followed up on that point, agreeing that such conversions would be great for the city but cautioning that office-to-residential conversions are “among the riskiest things you can do in my business” because of the high costs, long time horizon, and considerable regulatory hurdles.
Van Nieuwerburgh doubled down on that, citing a statistic that over the past seven years, only 1 percent of New York’s office inventory has been converted to residences, and a highly optimistic expectation for the next three to four years would be the conversion of just another 1 percent.
But Stein emphasized that what these perspectives don’t account for are changes the city could make to zoning codes, for example, to allow denser residential development in areas where it’s appropriate, which would swiftly change how such economic calculations are made.
“Fundamentally, this plan talks about how we need to not just recover, but we need to evolve,” Stein said. “We need to make sure that the city is better positioned moving forward into this new world.”
4. Others, too, can be on the lookout for opportunities amid transformation.
Plenty of people outside of city leadership will find opportunities to meet the new needs being formed by these tectonic shifts, the panelists agreed.
Van Nieuwerburgh noted that he believes a business model set to “get new life” is the shared-office-space offering—though he doesn’t necessarily think the longtime dominators of the space, like WeWork, will be the biggest beneficiaries. After all, any resourceful landlord can develop an app to make it easy to sign up for flexible leasing structures—for example, a small startup may need office space only on Mondays and Fridays.
“I think that’s good news for creative landlords who can use their buildings more efficiently,” Van Nieuwerburgh said, “even if it’s very bad news for aggregate demand for office space.”
Bienstock added that as his firm designs, develops, and updates office spaces, it is shifting its thinking as well, keeping in mind new hybrid work needs. For example, when employees are called into the office for a partial week, it’s with a focus on working closely and collaboratively with their colleagues, which has implications for how an office should be laid out.
“There are more open spaces, there are more conference rooms, more collaborative spaces, fewer individual office spaces,” he said. “Everyone has incorporated a work-from-home component to work, so when they’re back, they want people to be together and intermingling.”
Watch the full panel discussion here: