The Department of General Services (DOGE) has initiated a significant cost-cutting measure by cancelling hundreds of federal office leases nationwide. This action includes the cancellation of 384 leases, leading to estimated savings of $144 million. The administration’s decision is, at least on its face, an attempt to streamline government spending. It has begun to severely impact the commercial real estate sector and will likely cause ripple effects throughout the economy.
The Social Security Administration leads the way with 23 cancelled leases. The Small Business Administration and the Geological Survey aren’t far behind, tied at 22 terminated leases apiece. These closures save money and shelter deficits. They reverberate through the complex U.S. mortgage market and commercial real estate ecosystem.
Commercial Real Estate Market Impact
DOGE’s lease cancellations are intensifying the shift in the CRE landscape. Fifty-seven percent of federal leases could be at risk since they fall outside the ten most populous states—and Washington, D.C. This scenario primarily affects areas that are already short on immediate access to economic stimulus packages.
According to Cameron LaPoint, an assistant professor of finance at Yale School of Management, these closures have pervasive effects. They can have an outsized impact on the economy writ large.
“The multiplication effects can be tied to thousands of loans across the country the way the commercial debt market works.” – Cameron LaPoint
The commercial real estate market is already feeling the impact, particularly in areas outside major urban centers where these federal offices once operated. As landlords face a wave of empty government offices, they can no longer rely on previous business models. According to industry wizard Mark Besharaty, landlords will have to get used to serving a much different tenant demographic.
“To mitigate what I see happening in most cases, the owners of these properties will have to reconfigure the properties to fit a different kind of tenant base.” – Mark Besharaty
The challenge is not just in repurposing these spaces, creating new opportunities, but balancing those new uses with complicated financial obligations attached to often restrictive commercial mortgages. As Besharaty explains, a lot of these bigger properties turn to traditional banking industries for their financing. This heavy reliance on commercial mortgage-backed securities (CMBS) further complicates the situation.
“A lot of these larger properties where the owner has a loan is through a banking institution or CMBS, and they securitize the loans into an asset pool and sell them off.” – Mark Besharaty
Broader Economic Consequences
The economic repercussions of DOGE’s activity reach well past the commercial real estate industry. Tom Whalen, an economist at Boston University, understands the impending contraction in economic activity as government spending shrinks.
“You could say it harkens back to John Maynard Keynes and his idea that the government can stimulate the economy through spending. Similarly, when the government withdraws funds from the economy, economic activity will contract.” – Tom Whalen
As DOGE’s lease terminations go into effect, we’re reminded that this problem goes well beyond the borders of Washington, D.C. It’s not just their issue, but a truly national concern that impacts communities from coast to coast here in the United States.
“This is a national-scale issue, it’s not just D.C., it’s throughout the country.” – Mark Besharaty
The local economy is dealt a second blow by the ripple effect. Locally owned businesses that rely on federal contracting work, or the walking business from government employees, are seeing their customer base immediately shrivel up. As a real estate analyst, Alexi Morgado explained, some of those markets are already starting to feel the chain reactions caused by these cancellations.
“I’m seeing the effects of cancelled federal leases developing into a chain reaction in a number of markets.” – Alexi Morgado
Future Directions for Federal Properties
While landlords will face increased pressures from their empty federal office tower stock, creative solutions will be necessary to avoid costly future unoccupancies. Given the potential of turning vacant office uptown into residential or mixed-use projects—which is undergoing adaptation in Chicago—the opportunity is ripe.
This transition will only be achieved with creativity and investment from the property owners. As Morgado points out, areas in Florida demonstrate how reduced public office space is pressuring landlords to reposition their properties for alternative uses.
“In Florida, while the markets remain strong, we are seeing areas where reduction of public office space has placed additional pressure on landlords to reposition in the market and find other uses for space.” – Alexi Morgado
As these changes continue to be introduced and implemented, stakeholders need to be engaged and vigilant. Perhaps more importantly, it’s imperative they confront the myriad of risks associated with government-leased facilities. The cascading ramifications of DOGE’s lease cancellations show just how connected the different sectors of our economy truly are.