DOGE targets federal leases, shaking commercial real estate’s recovery

For many companies — and possibly the federal government — the era of remote work is drawing to a close.

Employees at major companies like JPMorgan Chase and Amazon are being called back into the office five days a week. Under President Donald Trump’s administration, thousands of federal employees have been told to return to in-person work full-time — or submit their resignations.

That may not be good news for workers who prize flexibility, but it has helped fuel a rebound in the commercial property market.

Demand for office space rose by nearly 40% between 2022 and 2024, according to a report last month from VTS, a commercial real estate management software. At this pace, VTS estimates that national office demand should rebound to pre-pandemic levels in the next four years.

However, the office market’s full recovery isn’t assured. The Department of Government Efficiency, which was established by Trump last month and is run by billionaire Elon Musk, has asked the government agency in charge of federal real estate to significantly reduce the government’s office space footprint, potentially flooding the commercial real estate market with older, less desirable buildings.

Avoiding a doom loop

It wasn’t so long ago that some economists warned that the pandemic-era rise in remote work could usher in an “urban doom loop” in some cities. The term refers to a downward spiral if workers who didn’t need to return to the office decided to leave expensive cities behind. With fewer residents, retailers in those cities could close and crime could spike, leading to an even greater exodus.

So far, that fate appears to have been largely avoided in most US cities.

The commercial real estate sector finished 2024 on an encouraging note after the Federal Reserve cut interest rates three times in a row late last year, said Charlie Dougherty, senior economist at Wells Fargo. That came after the central bank hiked rates to the highest levels in decades as it fought to bring down inflation by discouraging borrowing and cooling the economy.

Dougherty said the office building sector was benefiting from companies requiring employees to be present in the office.

“More workers are returning to the office, which I think is reflective of the general softness you’ve seen in the labor market,” he said. “Workers don’t have the same type of bargaining power they once did.”

Although the labor market has remained relatively strong, job growth has been slowing and hiring has dropped off.

All of the cities measured by VTS experienced annual growth in office demand except Boston and Los Angeles. San Francisco, which saw its tech worker-heavy population decrease and suffered several high-profile retail closures in the years after the pandemic, saw a significant increase in demand, according to VTS.

New York City is where the recovery has been strongest, with office demand nearly at pre-pandemic levels, according to VTS.

Rents for premium office space in New York are now at all-time highs, said Scott Homa, head of Americas property sectors research at JLL, a global real estate and investment company.

Class A buildings, which are newer, high-end offices often found in desirable neighborhoods, have seen the most significant demand, Homa said. More often, employers are now seeking new, attractive office spaces with extra amenities like fitness centers and food courts to entice workers back into the office.

But while most cities have largely avoided a doom cycle, roughly a fifth of all office space is still vacant, according to Trepp, a commercial real estate data company.

Lesser-quality Class B and C buildings are still struggling.

For example, the former Ameriprise Financial Center in downtown Minneapolis, which sold for $200 million in 2016, was sold again last month for $6.25 million — a 97% price cut in less than a decade.

“What’s been the defining theme throughout this recovery cycle has been a flight to quality, meaning tenants want to be going to the highest quality spaces and the most desirable sub-markets,” Homa said.

DOGE’s impact

One sizable user of office space is the federal government: It currently leases almost 150 million square feet of office space across the US, paying more than $5 billion annually in rent, according to a recent report by Trepp.

According to two sources familiar with the situation at the General Services Administration, the agency is expected to begin terminating about 3,000 “soft-term” leases (of nearly 7,000 total leases across the country). Oftentimes, government leases include a period of time called a soft term, where the government may pay a higher rent but can choose to cancel their lease commitment at any time. Leadership has been advised of a push to cancel 300 leases per day.

DOGE has posted on X that it has already canceled dozens of leases in the last two weeks.

If enough federal leases are terminated, it could mean even more office buildings sit empty.

Darrell Crate, the CEO of Easterly Government Properties, a company that has leased 100 buildings to the federal government through the GSA, said that the federal government would likely first unload hundreds of square feet of older Class B and C buildings.

“Over the next five years, there will be an increase in the supply of space and then some of those buildings will get repositioned into retail or residential,” Crate said. “Some will put pressure on the office market in Washington DC, though.”

“You’re likely going to see pressure in the office market for the next five to 10 years,” he added.

CNN’s Hadas Gold, Tierney Sneed, Phil Mattingly, Katelyn Polantz and Rene Marsh contributed reporting.