Impact on certain markets may be “profound,” attorneys warn, as federal agencies look to cut the size of their real estate footprint by as much as 50 percent under the Trump administration.
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While cities across the U.S. continue to struggle through an office market downturn that has thrown the future vitality of downtowns into question, financial analysts are now warning that some cities are disproportionately at risk from the Department of Government Efficiency’s real estate cost-cutting.
According to a Barclays Plc analysis first reported on by Bloomberg, $12 billion in real estate loans tied to commercial mortgage bonds are at risk as part of the cost-saving measure overseen by Elon Musk, the world’s richest man and the person entrusted with running DOGE.
DOGE and government officials have said they were looking to “right-size” the federal real estate portfolio of more than 7,500 leases. That puts a handful of major cities at risk.
Bloomberg reported that Washington, D.C., is the most exposed, with $600 million in government leases tied to commercial mortgage bonds (CMBS). Chicago is next, with $376 million, followed by New York with $324 million, Los Angeles with $322 million and Arlington, Virginia, with $240 million.
Government officials have said they are looking to reduce the federal government’s real estate footprint by as much as 50 percent.
The cutting will focus largely on office space, as cities grapple with record-high office vacancy rates that are weighing on downtown areas.
Some of that vacancy is caused by buildings rented by the federal government, and DOGE has said it had already identified and canceled leases on dozens of unspecified properties as of last week.
In the past 6 days, the number of lease terminations of underutilized buildings has increased from 3 to 22, with savings increased from $1.6M to $44.6M. https://t.co/b4EV4NYX96
— Department of Government Efficiency (@DOGE) February 3, 2025
There are questions around whether the government will be able to back out of its leases, however.
Attorneys with the law firm Arnold & Porter wrote in a whitepaper on Monday that the government’s leases in place at its targeted buildings will dictate when and how the government can vacate a lease.
“Therefore, any effort by GSA to terminate leases during what is referred to as the ‘firm term’ of those leases — the term during which there is no ‘termination for convenience’ right — simply because the government decides it wants to reduce the federal footprint will constitute a breach of the lease and entitle the property owner to damages,” the attorneys wrote.
But the attorneys noted that the government has leases that likely allow them to cancel contracts on as many as 45 percent in markets like Atlanta.
“As a result, the potential effect in some markets may be profound,” the attorneys wrote.