There’s no doubt about it: Things aren’t looking so great for commercial real estate, especially for office space.
Look no further than a revised forecast issued earlier this month by a group of researchers from New York University and Columbia University, which predicts that office values in New York City alone will plummet a staggering 44% by 2029. That’s much steeper than the group’s prior prediction—issued a year ago—for NYC office values to fall 28% by 2029.
The stickiness of remote work, coupled with interest rates spiking just as many commercial real estate loans come due, is the underlying source of the commercial real estate bearishness. However, at least in the eyes of Tesla CEO Elon Musk, property declines will soon spread beyond commercial real estate.
On Monday, Musk insinuated that pain awaits the residential housing market when he tweeted that “Commercial real estate is melting down fast. Home values next.”
But the loss in demand for commercial real estate is what’s driving demand for residential real estate. People who work from home need more space at home. Sales volume is down because inventory is down. Today, home prices increased for a second straight month.
— Glenn Kelman (@glennkelman) May 30, 2023
Musk didn’t say how much he thinks U.S. Home prices will fall—nor did he explain why. He also got some pushback.
On Tuesday, Redfin CEO Glenn Kelman shot back at Musk, tweeting, “But the loss in demand for commercial real estate is what’s driving demand for residential real estate. People who work from home need more space at home. Sales volume is down because inventory is down. Today, home prices increased for a second straight month.”
The idea that remote work has boosted home prices during the pandemic is supported by research published last year by researchers at the Federal Reserve Bank of San Francisco. The San Francisco Fed paper argues that upwards of 50% of Pandemic Housing Boom gains through November 2021 can be attributed to an elevated demand for “space” created by the pandemic’s remote work shift.
“Our results suggest that rising house prices over the pandemic reflected a change in fundamentals rather than a speculative bubble. This implies that the evolution of remote work may be an important determinant of future housing costs and inflation,” wrote the team of San Francisco Fed researchers.
So who is right, Kelman or Musk? The industry is fairly divided.
While national home prices have fallen a bit—down 2.2% from June 2022 according to the seasonally adjusted Case-Shiller National Home Price Index—they aren't crashing broadly. Some markets like San Francisco (down 12.9% from its 2022 peak), Phoenix (down 8.4%), and Las Vegas (down 9.0%) have fallen sharply. However, many places in the Midwest, like Chicago, and along the East Coast, like Miami, are still near all-time highs.
Economists at firms like Zillow and CoreLogic argue that national home prices have bottomed, while firms like Moody's Analytics and Fannie Mae think that national home prices—which rose on a month-over-month basis in February and March according to Case-Shiller—will soon flip back into correction.
Want more housing data? Follow me on Twitter at @NewsLambert.