DOGE and the Degradation of Values in the Government Lease Sector
After 76 lease cancellations were rescinded from GSA on May 27, it is crucial to understand the impact that is expected for GSA owners because of DOGE, the Department of Government Efficiency. The newly-found DOGE agency (over the course of three weeks, starting on February 18, 2025) sent out letter terminations to the landlords of roughly 793 GSA leases, causing a massive frenzy in the market as to what the future of leasing would be like in the federal government lease space. While many have fears that are justified, there are plenty of buyers and sellers that don’t seem to have truly examined what types of leases have been terminated, or what other variables are at play that can affect the quality of this guarantor in the future.
GSA Building Essentials
First, it is important to define what would normally be considered a GSA-anchored building. A GSA-anchored building would be any property that is more than or equal to 50% leased to a government tenant, as most buyers in the GSA space are looking for something similar or better. At the height of the total amount of lease terminations that were sent (863 lease terminations), exactly 363 terminations have been rescinded. That is a 42% reversal rate, and of those 494 leases that are still up for termination, 279 of those leases were below 5,000 square feet.
This means that close to 60% of the leases that are still being terminated are mostly full of unused space in multi-tenant buildings where GSA is most likely not even the anchor tenant in those facilities. As such, most buildings where GSA is the sole tenant should not have a huge amount of fear of the government vacating, or at least not right now. For example, only 3.3% of GSA’s leasing inventory is up for termination (those 494 leases).
Property Implications
The more pressing issue is that this initiative by the federal government to save as much money as possible has included mass firings of GSA employees, many of whom are critical in helping to get new leases executed, get tenant improvement projects completed, or help in the creation, design, and development of new GSA buildings.
For reference, there was a 90% staff reduction at the Public Building Service’s northwestern regional office. In fact, there were over 1,000 employees that were fired, with another 2,100 that have accepted the president’s deferred resignation offer to resign after September 30, 2025. This is roughly 25% of GSA’s 12,000 employee workforce. This offer was not made available to all government employees, as it excluded military workers, post office employees, etc., but owners have already shared how this has been affecting their timelines to get projects completed by GSA. The process is slower than ever and could affect cap rates in the future if the tenant’s lack of response or limited resources means that these buildings become more management-intensive for the landlords.
Additionally, with the downgrading of the U.S. credit rating from Moody’s to below a Aaa rating— the last credit rating agency to join S&P Global and Fitch in downgrading America’s credit worthiness—this could mean higher borrowing costs from lenders. Now, lenders must take on the additional risk of tenant downsizing and must worry about the continued rise in the nation’s debt situation. In fact, the Congressional Budget Office has projected that the federal debt will reach 156% of GDP by 2055 if current policies are still in place.
Key Considerations
Overall, while there are many changes occurring in the government lease market right now, the decision-making process to hold or dispose of an asset should not change. The tenant’s mission and use of space are always the most important factors to consider when buying or selling a government lease building. There is still a need for these facilities, and it is now more evident than ever that the federal government needs the private sector to manage their real estate.
