Government Looks To Cut 100 Federal Leases In D.C. Causing Alarm In The Commercial Real Estate Market

As the Trump administration’s Department of Government Efficiency scythes through the federal government in an attempt to cut costs, CoStar reports that the department headed by Elon Musk says it has canceled or restructured 98 federal leases covering more than 2 million square feet of space across the country.

The department says the lease bloodletting has saved taxpayers $78.9 million, with 63% of the square footage and 69% of the cost savings occurring in D.C. The federal government’s real estate manager, the General Services Administration, announced in early February that it ended 22 leases in a decision that would result in a total of $44.6 million in cost savings. The latest culling adds to that number.

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“Most of them were not surprises to me,” Lucy Kitchin, managing director of Transwestern’s government services advisory group, told CoStar News in an interview.

Broad-Based And Unpredictable Lease Slashing

The fact that the government does not own most of the buildings it inhabits but rather rents them might surprise many. One of their landlords, the Sterling, Virginia-based Office Properties Income Trust OPI, leases 110,000 square feet, representing $856,000 in annual revenue. CEO Yael Duffy described the government’s lease slashing as “broad-based and unpredictable” to CoStar but felt confident that the remainder of their leases were on solid ground in “mission-critical agencies” with minimal risk of vacating, such as the Secret Service, Veterans Affairs, Social Security and the Department of Justice.

The Government Is Overpaying For Its Office Space

Office Properties Income Trust is not the government’s only landlord. According to GSA data, federal government entities totaled 174 million square feet and generated $5.78 billion in annual rental payments. That might be too much, according to Alan Todd, managing director and head of CMBS strategy for Bank of America Securities, who analyzed how much the government pays in rent compared to nearby office buildings.

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“We found that, across 20 large US metro areas, the government appears to be paying rates per square foot that are roughly 50% higher on average than is required for other office buildings in the surrounding market," he told CoStar. "We doubt that the higher rental rates are indicative of property quality, which suggests these assets could potentially draw attention from cost cutters.”

Low Hanging Fruit

Bank of America analysts quoted in the CoStar article said the 18.4 million square feet of leases scheduled to expire this year are low-hanging fruit for saving money. As per GSA data, 54 million square feet are under federal leases with termination rights, amounting to $1.65 billion in annual rents.

According to Newsweek, the government department has been shuttering federal offices nationwide. However, Trump's policy is nothing new; GSA has reduced the US government's office footprint by 43% from 2013 to 2023, according to the Washington Post. No reduction, though, has been undertaken with the speed and apparent abandon of the current administration’s federal shrinking, with employees being offered buyouts en masse and being let go immediately. A judge has since blocked the firings, but many workers have already left. The implications for those employees are not yet known.

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The Ripple Effects Could Be Felt Throughout Commercial Real Estate

“You will see there’s a lot of buildings in Washington that are going to go away,” said Darrell Crate, chief executive of Easterly Government Properties DEA, a real estate investment trust that leases office space to the federal government, told The Wall Street Journal. The ripple effects could be felt throughout the commercial real estate infrastructure, which has struggled to recover from the pandemic shutdown.

“This could lengthen the recovery timeline, cause a stall out in the rental rate recovery, and cause vacancy rates to stay elevated longer than what we had hoped,” Stephen Buschbom, research director at data company Trepp, told The Journal.

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