The Office Market Had It Hard in 2023. Next Year Looks Worse.

Office building owners, hammered by falling demand and high interest rates, struggled in 2023. But they mostly managed to stay afloat.

That is going to be a lot harder to do next year.

Many landlords have been able to extend their loans, often by putting in more capital. But a lot of those extensions are now expiring, and owners are losing hope that occupancy rates will rebound soon.

That means many more office landlords will be compelled to pay off their mortgages, sell their properties at a steep discount or hand their buildings over to their creditors.

“In 2024, it’s game time,” said Scott Rechler, chief executive of RXR Realty, a major owner of office buildings in the New York region. “Owners and lenders are going to have to come to terms as to where values are, where debt needs to be and right-sizing capital structures for these buildings to be successful.”

Office demand shows no sign of returning to pre pandemic levels. While the number of full-time remote employees has dwindled, hybrid workplace policies look here to stay. In the fourth quarter, 62% of U.S. businesses allowed employees to work from home some days of the week, up from 51% in the first quarter, according to Scoop Technologies.

Return-to-office rates also stalled for most of 2023. Kastle Systems, which tracks security-card swipes in 10 major U.S. cities, said that average office attendance is about half of its pre pandemic level. Placer.ai, which tracks mobile phone data, puts it in the 60% to 65% range. But it also said the return rate has topped out.

The office market has shown “some monthly fluctuations but little real change in the overall trajectory,” Placer.ai said in a November report.

The U.S. office vacancy rate stands at a record 13.6%, up from 9.4% at the end of 2019, according to data firm CoStar Group. The firm is forecasting it will rise to 15.7% by the end of 2024 and will peak above 17% by the end of 2026.

That vacancy rate is poised to push higher because nearly half of office leases signed before the pandemic haven’t expired, CoStar said. When they do, many of the businesses will likely take less space than they are currently occupying, whether they are renewing or relocating.

Take the case of Chicago law firm Neal Gerber Eisenberg, which signed one of the city’s largest 2023 office leases earlier this fall. The firm, which has grown steadily throughout the pandemic, adopted a policy that requires employees to work from the office at least eight days a month. Neal Gerber leased 90,000 square feet at its new location, down from the 113,000 square feet it will be giving up.

Beyond the longer-term decline in demand, office landlords are still contending with high interest rates. Landlords that have to refinance debt borrowed when rates were at historic lows will face much higher borrowing costs as high vacancy is putting rents and incomes under pressure.

In recent weeks, inflation has been declining and the Federal Reserve is likely to ease interest rates in 2024. That will soften the blow. But landlords still face a financial squeeze, analysts say.

“If you have a mortgage that’s expiring at 3% or 4%, there’s no way you’re refinancing at 3% or 4%,” said Steve Sakwa, an analyst with Evercore ISI. Even though rates have come down, he added, property owners are still looking at rates that could be double their expiring rates to refinance.

Not all the signals are bleak for the office market in 2024. Demand is still strong for the highest quality and best-located space in many markets from tenants willing to pay high rents to encourage employees to return to offices.

Developers have retreated from new construction in the sector, so there’s little competition from new supply. The 30 million square feet in office construction starts in 2023 was the lowest amount since 2010, according to CoStar.

Cities such as San Francisco, New York and Boston are lowering costs and streamlining the process for converting obsolete office buildings into apartments. While this isn’t expected to result in a big decline in vacancy, the actions might bring more activity to business districts, giving a psychological boost to downtown landlords and businesses.

But the steadily rising number of owners who are defaulting on their mortgages because of falling rent rolls looms over the market. The delinquency rate of bank loans and loans converted into commercial mortgage-backed securities currently is over 6% compared with below 1% before the pandemic hit, according to data firm Trepp.

High delinquencies combined with the dismal office outlook already have convinced some owners to hand properties back to lenders or sell for sharply discounted prices.

In Stamford, Conn., the owner of One Stamford Forum, a 500,000-square-foot building whose tenants include troubled Purdue Pharma, this fall gave the building back to its creditors, according to Trepp. In San Francisco, buyers have purchased office buildings like 60 Spear Street and 350 California Street for fractions of what they were worth before the pandemic.

Trepp is projecting that the office delinquency rate could be over 8% by the second half of next year. As more landlords default, the new owners that replace them—buying in at greatly reduced prices—will likely put more pressure on the market because they’ll be able to charge lower rents and still make a profit.

“What could be catastrophic is if you start seeing corporate profit pressures leading to continued or accelerated pace of office downsizing,” said Stephen Buschbom, Trepp’s research director.

Luke Michel has already lived through two technology overhauls in his career, first desktop publishing in the 1980s and online publishing later on. But AI? He’s had enough.

So when his employer, the Dana-Farber Cancer Institute, made an early-retirement offer to some staff last year, the 68-year-old content strategist decided to speed up his exit. Before, he had expected to work a couple more years.

“The time and energy you have to devote to learning a whole new vocabulary and a whole new skill set, it wasn’t worth it,” he said.

It isn’t that he’s shunning artificial intelligence—he is learning Spanish with the help of Anthropic’s Claude. But, at this point, he’s less than eager to endure all the ways the technology promises to upend work.

“I just want to use it for my own purposes and not someone else’s,” he said.

After rising for decades and then hovering around 40% in the 2010s, the share of Americans over 55 years old in the workforce has slipped to 37.2%, the lowest level in more than 20 years.

The financial cushion of rising home equity and stock-market returns is driving some of the decline, economists and retirement advisers say.

But for some older professionals, money is only part of the equation.

They say they don’t want to spend the last years of their career going through the tumult of AI adoption, which has brought new tools, new expectations and a lot of uncertainty.

Many people retire when key elements of their work lives are disrupted at once, said Robert Laura , co-founder of the Retirement Coaches Association and an expert on the psychology of retirement.

“Maybe their autonomy is being challenged or changed, their friends are leaving the workplace, or they disagree with the company’s direction,” he said.

“When two or three of these things show up, that’s when people start to opt out.”

“AI is a big one,” he adds. “It disrupts their autonomy, their professionalism.”

Michel, whose work required overseeing and strategizing on website content, has been here before.

When desktop publishing arrived in the 1980s, he was a graphic designer using triangles and rubber cement.

The internet’s arrival changed everything again. Both developments required new skills, and he was energized by the challenge of learning alongside colleagues and peers.

It felt different this time around. “Your battery doesn’t hold a charge as long as it used to,” he said.

He would rather spend his energy volunteering, making art, going to operas and chairing the Council on Aging in North Andover, Mass., where he lives.

In an AARP survey last summer of 5,000 people 50 and over, 25% of those who planned to retire sooner than expected counted work stress and burnout as factors.

About half of those retired said they had left work at least partly because they had the financial security to do so.

In general, older Americans are less likely than younger counterparts to use AI, research shows.

About 30% of people from ages 30 to 49 said they used ChatGPT on the job, nearly double the share of those 50 and older, according to a 2025 Pew Research Center survey of more than 5,000 adults.

Baby boomers and members of Generation X also experienced the sharpest declines in confidence using AI technology, according to a ManpowerGroup survey of more than 13,900 workers in 19 countries.

“We as employers aren’t doing a good enough job saying (to older workers), we value the skills that you already have, so much so that we want to invest in you to help you do your job better,” says Becky Frankiewicz , ManpowerGroup’s chief strategy officer.

Jennifer Kerns’s misgivings about AI contributed to her departure last month from GitHub, where the 60-year-old worked as a program manager.

Coming from a family of artists, she said, it offends her that AI models train on the creative work of people who aren’t compensated for their intellectual property. And she worries about AI’s effect on people’s critical-thinking skills.

So she was dismayed when GitHub, a Microsoft-owned hosting service for software projects, began investing heavily in AI products and expecting employees to incorporate AI into much of their work. In employee-engagement surveys, the company had begun asking them to rate their AI usage on a scale of 1 to 5.

When it came time to write reports and reviews, colleagues would suggest that she use ChatGPT.

“I’d be like, ‘I have no idea how to use that and I have no interest in using AI to write anything for me,’” she said.

It would have been more prudent to work until she was closer to Medicare eligibility, she said. But by waiting until her children were out of college and some of her stock grants had vested, the math worked.

Her first act as a nonworking person: a solo trip to Scotland, where she took a darning workshop and learned how to repair sweaters.

“The opposite of AI,” she said.

Employers already under pressure to cut workers—such as in the tech industry—may welcome some of these retirements, said Gad Levanon , chief economist at Burning Glass Institute, which studies labor-market data.

“The more people retire, the fewer they have to let go,” he said.

Some of the savviest tech users are also balking at sticking around for the AI upheaval. Terry Grimm, who worked in IT for 40 years, retired from his senior software consultant role at 65 last May.

His firm had just been acquired by a bigger firm, which meant learning and integrating the parent company’s AI and other tech tools into his work.

Until then, Grimm expected he might work a couple more years, though he felt that he probably had enough saved to retire.

“I just got to the point where I was spending 40 hours at work and then 20 hours training and studying,” said Grimm, who has since moved with his wife from the Dallas area to a housing development on a golf course in El Dorado, Ark.

“I’m like, ‘I’ll let the younger guys do this.’”

The Office Market Had It Hard in 2023. Next Year Looks Worse.

Office building owners are losing hope that occupancy rates will rebound soon

Their careers spanned the personal computing, internet and smartphone waves. But some older workers see AI’s arrival as the cue to exit.