It hasn’t gotten much attention, but one of Elon Musk’s major DOGE initiatives is a massive fire sale of federal office space. Despite forcing federal employees back to the office by abolishing telework programs, Musk and company want to unload a large number of unused properties and recoup that money for the budget, a process that could expand if worker purges continue.
That theoretical win-win, however, will soon come into contact with the realities of commercial real estate markets, which are particularly depressed when it comes to the very type of inventory the government wants to sell. Older office space is experiencing record vacancy levels, with owners struggling to refinance the buildings. Putting large amounts of it on the market could have dramatic consequences, including damaging the economy in cities like Washington, D.C. It could lead to widespread defaults in financial securities linked to commercial mortgages. And if unchecked, that could lead to broader pain.
“Every additional shock is painful,” said Stijn Van Nieuwerburgh, a professor of real estate and finance at the Columbia Business School. “I’m not sure they’ve thought this fully through.”
“Not thought through” stands to be a familiar theme of the new government brought to you by Silicon Valley’s masters of the universe.
A POTENTIAL CRASH IN THE OFFICE SECTOR of commercial real estate (CRE) has been a looming hazard ever since the pandemic, as increased work-from-home has lessened the need for such properties. The time-honored tactic of extend and pretend, where some loans get rolled over and the market waits out the problems, has so far mitigated the damage. But the warning signs are there.
Over 20 percent of U.S. office space was vacant in 2024, according to financial analysts at Moody’s, and this year is expected to be rocky as well. A growing number of older buildings (known as Class B and C offices by the lingo of CRE) are simply being torn down; one industry veteran lists about 30 percent of the entire office portfolio as “basically worth nothing.”
Van Nieuwerburgh told me that many older buildings in particular are going at discounts of up to 90 percent relative to their pre-pandemic valuations. Banks have taken large losses on CRE mortgage debt, though most have been able to absorb the losses. (Signature Bank did fail in 2023, largely because of CRE, and New York Community Bancorp, which bought Signature, has been teetering.)
“The election of Trump has caused optimism in the CRE industry for no good reason,” Van Nieuwerburgh said, noting that many Trump policies, like deportation of construction laborers, higher cost to materials from tariffs, and rising interest rates to cool down prices, would all be bad for real estate. “It would be a mistake to be unambiguously optimistic about the asset class.”
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Into this mess comes the General Services Administration (GSA), now staffed at the senior level mostly by Musk allies, ready to sell office space into a buyer’s market. There’s reportedly a list of more than 500 buildings on the way out, on the road to a proposed 50 percent reduction in overall space. “The intention of GSA and the whole federal government is to reduce the number of old buildings that are owned with high liabilities … in favor of newer leased buildings, which can be more flexible and are more modern, that have ways for teams to collaborate and have private spaces,” said Thomas Shedd, head of the Technology Transformation Services, a division of GSA, in a recording of a staff meeting on February 5.
This would be exactly the wrong strategy for the moment, as Van Nieuwerburgh explained. A reliable government tenant is the only thing making any building the government currently owns at all valuable. “If the government sells the building and also vacates it, that building will be close to worthless, especially in a market with a lot of vacancy,” Van Nieuwerburgh said. Maybe some buildings could be converted into apartments as a potential win-win, but those conversions are maddeningly complex and expensive, and would require selling at even bigger discounts to make the financing work.
That’s probably why GSA sold a grand total of five buildings in 2023. Forcing sales anyway could bring valuations way down and harm local CRE markets more broadly.
The only way selling old office buildings could be anything but a slaughter is by continuing to lease them as a tenant, in a kind of sale-leaseback arrangement popularized by private equity firms. Maybe the government sells a building for $100 million and commits to staying there for ten years at the cost of $10 million a year. It would save no money in the long run but would be spun as a short-term savings when blasted out by DOGE.
And gimmickry like that is probably the best-case scenario.
GSA, HOWEVER, IS ALSO VERY INTERESTED in shedding leases, too. DOGE has already announced the cancellations of 22 leases as of February 2, with a savings of $44.6 million. The plan is to cancel leases on as many as 7,500 buildings in all, according to the Associated Press. GSA has even worked on canceling leases on offices for federal public defenders, something it cannot do because public defenders are part of the judicial, not the executive, branch.
But for the most part, the government is locked into its leases. Real estate analyst Trepp estimates that GSA can terminate up to 53 million square feet of office space between now and 2028, about 35 percent of its total. But the agency is setting its aspirational goals much higher than that.
Trying to cancel leases not up for renewal would trigger hefty fines, saving no money whatsoever. But the Trump-Musk history of stiffing creditors, pulling out of leases, and skirting accountability could come into play here. “They may just say, ‘We’re out of here. Come after me,’” one former CRE lawyer told Virginia Business. That would be very destabilizing.
By rapidly terminating bunches of leases, the government will throw a glut of properties onto the rental market all at once, particularly in areas like the Washington, D.C., metro, where the government leases around 10 percent of all office space, or Kansas City, where it leases almost 6 percent. Even places not thought of as federal hubs, like Denver, could see significant effects.
Reduced prices are good for tenants but terrible for CRE owners in a fragile market, and for local governments, which reassess vacant buildings lower for property tax purposes. Moreover, most office mortgages are folded into commercial mortgage-backed securities (CMBS), where delinquency rates are increasing and default rates are currently higher than during the financial crisis, according to analyst Wolf Richter. I wrote last August about significant downgrades to CRE mortgage bonds; last May, we saw the first losses in a CMBS for the lowest-risk investors since 2008. In other words, landlords and their lenders could feel the stress.
“The federal government as a tenant is considered to be a very strong creditor,” said Van Nieuwerburgh. “If the GSA leaves, that building will be marked down dramatically. If you have to refinance the debt, you will have a hard time refinancing that mortgage.” Van Nieuwerburgh noted that in 2024, 39 percent of office loans that came up for maturity defaulted, and fewer than half actually paid off the loan. If a building is worth less, has reduced cash flows, and higher interest rates, it’s something of a perfect storm for defaults. And a GSA fire sale would be what precisely triggers that.
Lots of doomsayers have been predicting dark times led by a CRE collapse for a while, which would include bank collapses from the CMBS defaults or rapid erosion in large city budgets from the degradation of the tax base. Continued rollovers of bad loans have held off the pain. But the GSA fire sale is a recipe for generating tons of distress in a market that’s already in trouble, and it could spark something that rages out of control.
Sales and lease terminations “only make sense for isolated assets in markets that are relatively strong,” said Van Nieuwerburgh. Otherwise, the knock-on effects are too uncertain. But this isn’t a crowd that thinks things through slowly and carefully.
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