An Elon Musk-led government cost-cutting purge threatens to weigh down an already depressed US office market. Christopher Walker reports
One of the many surprises unleashed on markets by the ‘Great Disruptor’, Donald Trump, has been the creation of the Department of Government Efficiency, ironically led by not one, but two people – tech billionaires Elon Musk and Vivek Ramaswamy.
The choice of the acronym DOGE, which just happens to also be the name of one of Musk’s favourite cryptocurrencies, along with his lofty claims that the new non-governmental body could achieve $2trn (€1.94trn) of spending cuts, has discouraged many investors from taking it seriously.
But they would be wrong. The initiative has the potential to massively shake up the US office market – just when the sector has been undergoing a period of structural declines in demand and value.
The $2trn claim may not stand up to scrutiny. Roughly 60% of the US government’s $7trn budget comprises ‘mandatory spending’ — primarily Medicare, Medicaid and Social Security. But then again Musk has a history of achieving the apparently unachievable. At Twitter, now X, he engineered enormous downsizing, including 80% staff cuts.
Headcount reductions are certainly on DOGE’s agenda. In an opinion piece in the Wall Street Journal, Musk and Ramaswamy promised to embed DOGE appointees in government agencies and identify “the minimum number of employees” necessary. They plan on cutting “administrative overgrowth” through “large-scale firings”.
All of this has obvious implications for US Government real estate – and not just offices. The federal government owns or leases almost 300,000 buildings, including offices, warehouses and health facilities, and almost 600,000 structures, including parking lots, bridges and military assets. These could potentially be sold off, as recommended by think tank The Cato Institute.
But offices are top of the list at present.
In a strongly worded report, Senator Joni Ernst argues only 6% of federal workers go into the office every day. Based on cell phone data, she alleges that the Department of Energy had an average daily occupancy of eight people in 2023. It employs nearly 5,000. In an interview on Fox News, Ernst threatened “getting those federal workers back into the office or eliminating the buildings that they occupy”, adding: “If we’re not using the space, we need to get rid of it.”
Pre-DOGE, downsizing was already in hand. The General Services Administration (GSA) recently offloaded eight “underused” properties. Together with 23 disposition projects that GSA announced last year and the three additional properties it announced in 2024, this will reduce GSA’s inventory by more than 6m square feet and save over $1.8bn in costs over 10 years, according to GSA.
DOGE seems likely to push that pedal to the floor. The deadline for cuts is 4 July 2026. Musk posted on X that he expects the cuts to be “done much faster”. And all of this comes on the back of a US office market that has been through a major downturn.
Where will the axe fall?
The Federal office footprint is significant in many markets. Most obviously Washington DC, where the GSA estimates it occupies 26% of the total office space inventory. But it is also dominant in Philadelphia (8%), St Louis (8%) and Atlanta (7%), and an important player in Chicago (3%), Boston (3%) and Dallas (3%). Even in New York City, it represents 1% of the market.
According to a report by Thomas Taylor and Orest Mandzy of real estate data and analysis firm Trepp, if the leases of half of GSA’s offices were terminated early, “the impact on rental income and the amount of newly created office vacancy would be immense”. GSA has a contractual right to terminate leases early.
“Any significant cuts to the GSA’s lease portfolio would likely have a disproportionate impact on the Washington office market, as well as all of the commercial real estate sectors downstream of office,” the report says. The federal government accounts for 22% of employment and services tied to it a further 24%.
Michael Lewis, real estate investment trust (REIT) analyst at Truist Securities, recently reduced his price target for Easterly Government Properties (DEA) from $14 to $13 on the back of “potential DOGE impacts on the company”.
DEA’s largest tenant is the Department of Veteran Affairs, providing 29% of its annualised lease income. “We would be surprised if this became a targeted agency for significant cuts,” Lewis says. But nonetheless, he adds, “we think it is reasonable for DEA investors to pause until we know more regarding what DOGE will ultimately do”.
Office REITs JBG Smith and Cousins Properties were also downgraded by BMO Capital. “DOGE has an unknown and potentially meaningful impact on office and multifamily demand in DC metro, where JBGS is solely focused,” said analyst John Kim in a research note.
But, it should be stressed, the effects will go way beyond Washington DC, and will be particularly damaging given the quality of properties being offloaded. Taylor and Mandzy believe “the majority of GSA-exposed properties are class B and C, which have already faced headwinds and would face increased tenant improvement costs to attract private-sector tenants, meaning that a mass termination of GSA leases could be daunting”.
As Brendan Wallace, CEO and “CIO of proptech investor Fifth Wall, told CNBC: “The government is the largest office tenant in the US…. and half their leases are cancellable in six months. Landlords across the country are looking at what could happen if the government gives back this much space. [It] could have a really challenging effect in an office market that is already struggling today.”
