As the US begins its first federal shutdown since 2018, the ghost of Elon Musk continues to rattle real estate markets across the US, with uncertainty impacts on the economy
Musk left the government a few months ago, but his legacy remains at Doge. One way Doge tried to cut government costs was to cancel leases for hundreds of offices across the country. The Doge website lists the amount saved from each lease that was cancelled, but in total, it canceled 384 cancelled leases with an estimated savings of around $140 million, but experts say the savings come at a wider economic cost.
Cameron Rapon, assistant professor of finance at Yale Management School, is studying the impact of Doge closures on the commercial real estate market. Lapoint points out that the government as a tenant was a very safe bet. As such, their leases often included cancellation clauses that were rarely called. Until now.
“If you and I are renting an apartment and canceling the lease, there is a rent penalty for several months,” LaPointe said. However, if the government cancels the lease, the landlord remains high and dry. It’s happening in cities big and small, countryside and red, cities and blue. “Many private property rents space to government agencies. They rely on these agencies that are in the space that pays rent for five years. Nowadays, landlords have to find new tenants.”
According to Lapoint, Savings Doge is advertised and is primarily based on the assumption that the government renewed its lease when it expired, but the Doge figures do not take into account that it is not naturally renewed due to normal government downsizing or relocation.
While it may not seem like hundreds of lease cancellations could send a shock to the country’s financial system, lease cancellations have a ripple effect. “The multiplication effect can be linked to thousands of loans across the country in the way the commercial debt market works,” Lapoint said.
Government leases provide stable and predictable income that is attractive to lenders. When these “anchor tenants” disappear, not only will they affect the building, but they can destabilize the broader commercial lending market as banks combine these real estate loans into investment securities. This means that the government-earned property issues can spread risk to thousands of other loans across the country.
A spokesperson for the General Services Administration, which manages federal assets, said it achieved prominent results in a short time to optimize its federal portfolio, estimated savings to American taxpayers at $113 million.
When the federal government leaves, Link Pin and confidence funding will also leave
“We’re looking forward to seeing you in a new business,” said Alexi Morgado, real estate agent and CEO of Florida-based Lexawise. “Supply availability does not always lead to immediate demand, and can burden operating profits and build value, complicating funding.”
Of the 384 leases currently listed on the Doge website for cancellation, the top three agency tenants are the Social Security Administration (23 leases cancelled), SMEs (22 leases cancelled), and geological surveys (22 leases cancelled).
According to a Lapoint study, the largest office Doge is a huge 845,000-square-foot office in DC, and the smallest one is a 250-square-foot Secret Service office in New York City.
The impact can be uneven depending on geography.
“In Florida, the market remains strong, but reducing office space will put pressure on landowners to relocate in the market and we will see areas where we will find other uses for the space,” Morgado said, with some relocations likely to include turning empty office space into residential or mixed-use developments. “For agents like me, it creates potential opportunities, but it also requires creativity and a much more strategic approach to repositioning spaces that can withstand what could come before,” he said.
Mark Beshalathi, Senior Vice President of Commercial Lending at California-based Arbor Financial Group, agrees that current large government office space landlords need to be creative.
“In most cases, to alleviate what I’m going on, owners of these properties need to reconfigure their properties to fit different types of tenant bases,” says Besharaty. Mitigation measures include allowing other companies to move as they break down large government agencies into smaller, manageable parcels.
In the meantime, the closure will continue to ripple through the complex ecosystem, the US mortgage market.
“Many of these larger properties that owners have loans are through banking institutions or through CMBs (securities backed by commercial mortgages), which securitize the loan into an asset pool and sell it,” says Besharaty.
If the property is empty, it can have a harmful effect on the entire asset pool, which can lead to higher interest rates. “It’s a national issue, not just in DC, but across the country,” he said.
Country America could be a huge hit
Rural properties with cancelled government leases face more serious risks as they are not usually included in these bundled loan packages, but that also means they have less financial cushioning when major tenants leave. Rural counties with fewer populations could also increase the risk of future federal lease cancellations.
Of the federal leases potentially on the chopping block due to past the eligibility date for early layoffs, 57% are outside of the 10 most populous states and outside of Washington, D.C.
On the Michigan countryside Upper Peninsula, Michel Hanley, mayor of Marquette, Michigan, says the closure of her city’s IRS facility causes minimal pain as there has been no in-person service since the community.
“The bigger problem with UP is that it has been cut to the Indian Affairs Office Bureau in Baraga and the Tribal Health (centre) in Sault Ste. Mary,” Hanley said. Indigenous peoples account for five times the local population density than the Lower Peninsula, and the mayor said the cuts would “stricken down.”
Tom Warren, professor and dean of business administration at Massachusetts Liberal Arts College, says the overall issue of lease cancellation costs is subtle.
“We can go back to his idea that John Maynard Keynes and the government can stimulate the economy through spending. Similarly, when the government withdraws funds from the economy, economic activity is contracted,” Hollen said, adding that he has a multiplier effect.
The Trump administration threatened that more federal workers could be fired as a result of the shutdown. Russell Vought, director of management and budget, told House Republicans during a conference call after the Trump administration began making effective cuts among federal workers, according to anyone familiar with the issue. White House Press Secretary Karoline Leavitt confirmed during the briefing that the layoffs “we expected to start within ‘two days’ soon.
The forecast market is currently betting that the shutdown will last for two weeks.
“When cutting leases, there’s less money to the landlord and those organizations can close the locations. So fewer people will work in those locations. Low rental income and job losses make them less economic stimulus,” Whalen says. “This will have a ripple effect across the local economy.”
