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.

In Singapore, it’s not unusual for total strangers to ask, “Have you eaten yet?” A greeting akin to “Good morning,” it invariably leads to follow-up questions. What did you eat? Where did you eat it? Was it good? Greeters reserve the right to judge your responses and offer advice, solicited or otherwise, on where you should eat next.

Locals will often joke that gastronomic opinions can make (and break) relationships and that eating is a national pastime. And why wouldn’t it be? In a nexus of colliding cultures—a place where Malays, Indians, Chinese and Europeans have brushed shoulders and shared meals for centuries—the mix of flavours coming out of kitchens in this country is enough to make you believe in world peace.

While Michelin stars spangle Singapore’s restaurant scene , to truly understand the city’s relationship with food, you have to venture to the hawker centres. A core aspect of daily life, hawker centres sprang up in numbers during the 1970s, built by authorities looking to sanitise and formalise the city’s street-food scene. Today, 121 government-run hawker centres feature food stalls that specialise in dishes from the country’s various ethnic groups. In one of the world’s most expensive cities, hawker dishes are shockingly cheap: A full meal can cost as little as $3.

Over the course of many visits to Singapore, I’ve fallen in love with these places—and with the scavenger hunts to find meals I’ll never forget: delicate bowls of laksa noodle soup, where brisk lashes of heat interrupt addictive swirls of umami; impossibly flaky roti prata dipped in curry; the beautiful simplicity of an immaculately roasted duck leg. In a futuristic and at times sterile city, hawker centres throw back to the past and offer a rare glimpse of something human in scale. To an outsider like me, sitting at a table amid the din of the lunch-hour rush can feel like glimpsing the city’s soul through all the concrete and glitz.

So I’ve been alarmed in recent years to hear about the supposed demise of hawker centres. Would-be hawkers have to bid for stalls from the government, and rents are climbing . An upwardly mobile generation doesn’t want to take over from their parents. On a recent trip to Singapore, I enlisted my brother, who lives there, and as we ate our way across the city, we searched for signs of life—and hopefully a peek into what the future holds.

At Amoy Street Food Centre, near the central business district, 32-year-old Kai Jin Thng has done the math. To turn a profit at his stall, Jin’s Noodle , he says, he has to churn out at least 150 $4 bowls of kolo mee , a Malaysian dish featuring savoury pork over a bed of springy noodles, in 120 minutes of lunch service. With his sister as sous-chef, he slings the bowls with frenetic focus.

Thng dropped out of school as a teenager to work in his father’s stall selling wonton mee , a staple noodle dish, and is quick to say no when I ask if he wants his daughter to take over the stall one day.

“The tradition is fading and I believe that in the next 10 or 15 years, it’s only going to get worse,” Thng said. “The new generation prefers to put on their tie and their white collar—nobody really wants to get their hands dirty.”

In 2020, the National Environment Agency , which oversees hawker centres, put the median age of hawkers at 60. When I did encounter younger people like Thng in the trade, I found they persevered out of stubbornness, a desire to innovate on a deep-seated tradition—or some combination of both.

Later that afternoon, looking for a momentary reprieve from Singapore’s crushing humidity, we ducked into Market Street Hawker Centre and bought juice made from fresh calamansi, a small citrus fruit.

Jamilah Beevi, 29, was working the shop with her father, who, at 64, has been a hawker since he was 12. “I originally stepped in out of filial duty,” she said. “But I find it to be really fulfilling work…I see it as a generational shop, so I don’t want to let that die.” When I asked her father when he’d retire, he confidently said he’d hang up his apron next year. “He’s been saying that for many years,” Beevi said, laughing.

More than one Singaporean told me that to truly appreciate what’s at stake in the hawker tradition’s threatened collapse, I’d need to leave the neighbourhoods where most tourists spend their time, and venture to the Heartland, the residential communities outside the central business district. There, hawker centres, often combined with markets, are strategically located near dense housing developments, where they cater to the 77% of Singaporeans who live in government-subsidised apartments.

We ate laksa from a stall at Ghim Moh Market and Food Centre, where families enjoyed their Sunday. At Redhill Food Centre, a similar chorus of chattering voices and clattering cutlery filled the space, as diners lined up for prawn noodles and chicken rice. Near our table, a couple hungrily unwrapped a package of durian, a coveted fruit banned from public transportation and some hotels for its strong aroma. It all seemed like business as usual.

Then we went to Blackgoat . Tucked in a corner of the Jalan Batu housing development, Blackgoat doesn’t look like an average hawker operation. An unusually large staff of six swirled around a stall where Fikri Amin Bin Rohaimi, 24, presided over a fiery grill and a seriously ambitious menu. A veteran of the three-Michelin-star Zén , Rohaimi started selling burgers from his apartment kitchen in 2019, before opening a hawker stall last year. We ordered everything on the menu and enjoyed a feast that would astound had it come out of a fully equipped restaurant kitchen; that it was all made in a 130-square-foot space seemed miraculous.

Mussels swam in a mushroom broth, spiked with Thai basil and chives. Huge, tender tiger prawns were grilled to perfection and smothered in toasted garlic and olive oil. Lamb was coated in a whisper of Sichuan peppercorns; Wagyu beef, in a homemade makrut-lime sauce. Then Ethel Yam, Blackgoat’s pastry chef prepared a date pudding with a mushroom semifreddo and a panna cotta drizzled in chamomile syrup. A group of elderly residents from the nearby towers watched, while sipping tiny glasses of Tiger beer.

Since opening his stall, Rohaimi told me, he’s seen his food referred to as “restaurant-level hawker food,” a categorisation he rejects, feeling it discounts what’s possible at a hawker centre. “If you eat hawker food, you know that it can often be much better than anything at a restaurant.”

He wants to open a restaurant eventually—or, leveraging his in-progress biomedical engineering degree, a food lab. But he sees the modern hawker centre not just as a steppingstone, but a place to experiment. “Because you only have to manage so many things, unlike at a restaurant, a hawker stall right now gives us a kind of limitlessness to try new things,” he said.

Using high-grade Australian beef and employing a whole staff, Rohaimi must charge more than typical hawker stalls, though his food, around $12 per 100 grams of steak, still costs far less than high-end restaurant fare. He’s found that people will pay for quality, he says, even if he first has to convince them to try the food.

At Yishun Park Hawker Centre (now temporarily closed for renovations), Nurl Asyraffie, 33, has encountered a similar dynamic since he started Kerabu by Arang , a stall specialising in “modern Malay food.” The day we came, he was selling ayam percik , a grilled chicken leg smothered in a bewitching turmeric-based marinade. As we ate, a hawker from another stall came over to inquire how much we’d paid. When we said around $10 a plate, she looked skeptical: “At least it’s a lot of food.”

Asyraffie, who opened the stall after a spell in private dining and at big-name restaurants in the region, says he’s used to dubious reactions. “I think the way you get people’s trust is you need to deliver,” he said. “Singapore is a melting pot; we’re used to trying new things, and we will pay for food we think is worth it.” He says a lot of the same older “uncles” who gawked at his prices, are now regulars. “New hawkers like me can fill a gap in the market, slightly higher than your chicken rice, but lower than a restaurant.”

But economics is only half the battle for a new generation of hawkers, says Seng Wun Song, a 64-year-old, semiretired economist who delves into the inner workings of Singapore’s food-and-beverage industry as a hobby. He thinks locals and tourists who come to hawker centers to look for “authentic” Singaporean food need to rethink what that amorphous catchall word really means. What people consider “heritage food,” he explains, is a mix of Malay, Chinese, Indian and European dishes that emerged from the country’s founding. “But Singapore is a trading hub where people come and go, and heritage moves and changes. Hawker food isn’t dying; it’s evolving so that it doesn’t die.”

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

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

No trip to Singapore is complete without a meal (or 12) at its hawker centers, where stalls sell multicultural dishes from generations-old recipes. But rising costs and demographic change are threatening the beloved tradition.