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Rightsizing the Federal Real Estate Portfolio
Disposal of underutilized properties could create challenges for the commercial real estate sector and local economies.
Since his inauguration in January, President Donald Trump has issued executive orders, presidential memorandums and presidential proclamations at a rate rivaling that of President Franklin D. Roosevelt during the Great Depression and World War II. It is too early to know which of his orders will survive legal challenges or future presidents, but it is clear that Trump’s second term will have a lasting influence on the way future administrations govern.
Trump’s executive actions have covered areas ranging from immigration and border security to tariffs, DEI programs and even the renaming of the Gulf of Mexico. However, it is the directive establishing and implementing the president’s Department of Government Efficiency (DOGE) that has drawn the most attention and resulted in some of the strongest opposition to date.
In February, Trump signed another executive order implementing the DOGE cost-efficiency initiative. The directive reorganized the U.S. Digital Service (USDS), an office within the Office of Management and Budget that was established in 2014 to “deliver better government services to the American people through technology and design.” The Trump executive order expanded the office’s mission to include federal staffing, as well as oversight of federal grants and contracts. In an act of political gamesmanship, the order also changed the official name of USDS to the U.S. DOGE Service, allowing it to maintain its existing acronym.
Directives issued by USDS are technically recommendations made to federal agencies, which must then initiate the necessary procedures to fulfill the prescribed guidance. One of DOGE’s recommendations is particularly relevant to the commercial real estate sector.
Selling Surplus Buildings
On March 4, the General Services Administration (GSA), the primary landlord and leasing agent for the federal government, published a list of 443 non-core properties that it intended to list for sale. The stated purpose of selling the buildings was to “ensure that taxpayer dollars are no longer spent on vacant or underutilized federal spaces.” The original list, since withdrawn, included the GSA headquarters building itself, along with the headquarters of the U.S. Department of Agriculture, the U.S. Department of Housing and Urban Development, the U.S. Department of Justice, the FBI, and the Office of Personnel Management, as well as a lengthy assortment of other federal buildings across the country.
The sale of federal buildings is a common practice for GSA. Federal agencies are required to regularly survey properties to identify those that are no longer needed, and those designated as excess properties are reported to the GSA’s Public Buildings Service (PBS).
When that happens, PBS takes control of that property and initiates a four-stage disposal process. First, PBS must offer the property for transfer to other federal agencies at fair market value. If the property is not transferred to another federal agency, it is designated as “surplus.” PBS must then offer it to state and local governments, followed by qualified nonprofits, for potential use in providing services to people without homes. If the surplus property is determined unsuitable for providing homeless services, and if no eligible entity has acquired it, PBS can offer it for use in providing other public benefits, including being converted for use as a school, correctional facility, hospital, park or airport. Only after the surplus property has not been accepted for any of these purposes can it be designated for sale, which is generally done through a sealed bid or auction process.
Federal Real Estate Leases
In the near term, the Trump administration may find success in terminating federal real estate leases. PBS Commissioner Michael Peters is calling for a 50% reduction in federal building space, both owned and leased. PBS has begun notifying landlords nationwide that federal agencies will terminate leases for nearly 800 offices and buildings deemed underutilized or vacant. However, not all locations will close by their targeted date; instead, agencies will either be required to negotiate new leases or relocate to different properties that better meet their needs.
Landlords with federal tenants are advised to consult an attorney and review their contracts. One aspect unique to federal real estate contracts is that the government does not have the right to terminate the contract for convenience. This is the result of standard language added to GSA real estate leasing contracts in 2016:
1.05 Termination Rights
“The Government may terminate this Lease, in whole or in parts, at any time effective after the Firm Term of this Lease, by providing not less than XX days’ prior written notice to the Lessor. The effective date of the termination shall be the day following the expiration of the required notice period or the termination date set forth in the notice, whichever is later. No rental shall accrue after the effective date of termination.”
While DOGE’s efforts to dispose of underutilized properties to save taxpayer dollars may be laudable, it does create challenges for the commercial real estate sector and local economies. The influx of large federal properties into the market can affect local real estate dynamics. In some cases, it may lead to a temporary oversupply, potentially lowering property values and rental rates.
It is too soon to determine the long-term impact of DOGE’s actions on commercial real estate businesses leasing to government agencies or on local markets. NAIOP’s Government Affairs team will continue to monitor these actions and engage with NAIOP members to ensure that DOGE receives input from the commercial real estate community.
Eric Schmutz is NAIOP’s senior director of federal affairs.
