MW How a smaller government real-estate footprint under Trump could boost cities

By Joy Wiltermuth

History shows that selling government-owned buildings or terminating their leases isn't quick or easy

Efforts to shrink the federal government's sprawling real-estate footprint that began in the Obama era have gained new urgency since President Donald Trump's inauguration.

The incoming administration's focus on a smaller government could create ripple effects in communities far beyond Washington, D.C., since the U.S. owns and leases one of the world's largest property portfolios.

But any new push by Trump's team to unload more of the government's real estate to private owners won't automatically spell doom and gloom for cities. It could actually help older office buildings establish their current worth, create opportunities for new owners or tenants and benefit surrounding communities hit hard by the pandemic.

"You haven't seen a massive wave of this come to market," said Jason Brooks, a portfolio manager at Janus Henderson Investors. "On the positive side, it could provide a legitimate clearing level for this type of office space."

Prices for office buildings in central business districts fell another 9.3% in December from a year before, according to MSCI's closely followed RCA commercial property-price index. They were down almost 48% on a three-year basis.

Conversions of old office buildings can be difficult, expensive and hard to pull off. But at the right price, they also can be "kind of a triple win," as SL Green Realty Corp's (SLG) chief executive put it Thursday during the Manhattan landlord's fourth-quarter earnings call, since conversions take obsolete office space off the market, chip away at the housing crisis and help revitalize prime central business districts.

New marching orders

Via executive order, Trump quickly established the Department of Government Efficiency, or "DOGE," an advisory commission that can make recommendations to Congress on ways to modernize the federal government and to cut costs for taxpayers.

In many ways, it's a new name for an old cause. Republicans have been putting extra emphasis on eliminating waste by the federal government, in part by taking aim at its stock of old and sparsely-used office buildings. But ridding the government of "wasteful spending" and shedding "excess properties" has been a clear focus at the White House since at least 2012.

The Wall Street Journal reported earlier this week that the Trump administration was considered selling two-thirds of the government's office properties, citing people familiar with the matter. It also indicated a large portion of the federal office leases in D.C. could be terminated.

The White House didn't respond to a request for comment on its current real-estate plans. But a deeper look at the government's office-lease exposure and a timeline of its termination rights shows that there's no immediate flood of broken leases swamping the market.

A big, sprawling footprint

The federal government reports its real-estate holdings as consisting of about 8,100 owned and leased properties, and some 500 historic buildings.

Those properties reside in roughly 2,000 communities nationwide, including significant office exposure in Virginia, Texas and Florida, locations that have benefited from a large and stable government footprint.

In terms of office-lease costs alone, the federal government currently pays $5.25 billion in annual rent, according to a new analysis from Trepp. But with only slightly more than 5% of that space eligible to terminate its leases before the end of 2025, it makes any quick exits difficult.

Furthermore, Trepp's data shows that figure growing to only about 35.5% of the space through 2028 and to 63.5% through 2034.

Darian LeBlanc, who has been managing real-estate firm Cushman & Wakefield's $(CWK)$ government services group since 2005, said the processes that underpin federal property ownership, as well as leases, make any moves to alter its footprint slow-going.

"There is a general sense that there will be dispositions of some obsolete federal buildings that can't be brought into service for the federal mission," LeBlanc said. "But there is a process, and it takes time. It takes study."

Passing Obama's torch

The push for greater government efficiency and a lighter real-estate footprint has been a work in progress for years, starting in earnest with the Obama administration "freezing," then shrinking, its physical footprint.

Under the Biden administration, property dispositions picked up. The General Services Administration, the government's landlord, reported $710 million in revenue from the disposal of federal property for the fiscal year 2024, surpassing its goal of $262 million.

The Trump administration might look to act even more aggressively than past administrations on GSA-owned and leased buildings, particularly once those properties no longer meet their mission, and potentially by selling assets at a discount, LeBlanc said.

Still, the federal government built many of the older properties it owns from the ground up, he said, and they've never traded hands to a new owner, nor established a market value.

"Nobody knows what these buildings are worth," LeBlanc said. "We will need to go through a pretty significant process to establish what market value is, before we can talk about what the discount is."

Not only a D.C. matter

Within the District of Columbia, the GSA's owned portfolio was pegged at 36.7 million square feet, with the large majority being office space, according to LeBlanc.

In terms of leases, it's 17 million square feet in the district, a far smaller figure than what the Wall Street Journal indicated could be ripe for cancellation under Trump, which might otherwise overwhelm local landlords.

Ermengarde Jabir, director of economic research at Moody's, said the impact of a smaller government-office footprint would also be widespread around the country.

She pegged Virginia as having the highest exposure to federal government leases, followed by D.C., Maryland, California, Texas, Missouri, Florida and New York, based on GSA data.

Jabir said "a balance will have to be struck between the policy of shedding office space and the desire for the federal workforce to return to in-person work full time," in emailed comments to MarketWatch.

This could lead to less space being shed than perhaps previously anticipated, she said. "Of course, landlords are still affected when the most reliable tenant to have, the federal government, decides to lease less space."

And yet, office-to residential conversions have been gathering steam in many cities, especially in downtowns and central business districts with walkable spaces.

SL Green has been tracking about 15 million square feet of office-to-residential conversions in the works in Manhattan, and see potential for that to eclipse 25 million square feet over the next five to seven years.

Cushman & Wakefield in 2024 studied 15 major U.S. cities, and found that including a greater mix of housing in those traditional work-centric economic hubs will be vital to improving overall real-estate values.

"It's not a doomsday scenario," said Rebecca Rockey, Cushman's deputy chief economist. "There's a huge opportunity here, as well."

-Joy Wiltermuth

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January 23, 2025 18:51 ET (23:51 GMT)

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