The Trump administration’s broader cost-cutting initiative, including the controversial DOGE plan, is sending ripples through the commercial real estate (CRE) market, putting billions of dollars in loans in jeopardy.
The General Services Administration (GSA) has rolled out a directive aimed at reducing federal office space by up to 300 leases a day, part of the administration’s cost-saving efforts under the DOGE program. This ambitious move threatens the $28.7 billion in GSA-backed leases, which serve as collateral for commercial mortgage-backed securities (CMBS) and CRE collateralized loan obligations (CLOs).
According to KBRA, 13.8 million square feet of GSA-leased space secure $15.6 billion in loans across 201 transactions, with some properties relying heavily on federal tenants for up to 50% of their leased space. The shift could lead to significant financial instability in the CRE sector, particularly in cities heavily dependent on federal leases.
The situation is further complicated by unclear data on federal workforce demand for office space. The Office of Management and Budget (OMB) reports that 54% of civilian federal employees work on-site, though other reports suggest the number may be as low as 6%. Adding to the uncertainty, the potential layoff of up to 200,000 probationary employees could lead to even fewer office space needs, exacerbating the problem.
Critics argue that the DOGE plan, which was implemented without a proper feasibility study or risk assessment, has failed to account for the potential consequences. As a result, the cost-cutting strategy, while aiming to reduce government spending, risks creating long-term economic instability in the commercial real estate market. Although efforts to encourage a return to office work could temporarily boost demand, the overall increase in vacant office space seems likely to outweigh any short-term benefits.
The lack of prior analysis and planning in the rollout of DOGE’s cost-saving measures has raised alarm about the long-term impact on both the CRE market and the broader economy, the fallout from these measures would be felt for years unless alternative policies are quickly implemented to stem the tide positively.
Source:
- credaily.com
- KBRA (Kroll Bond Rating Agency)
- Office of Management and Budget (OMB)
