Good Point

President Musk's current jihad against the federal civil service could have an unintended effect, crashing the already precarious Commercial Real Estate (CRE) markets.

As a result of the Covid pandemic, CRE is already in a very bad way, and the clearing out of  largely privately owned office buildings by government agencies will make the situation even worse.

It hasn’t gotten much attention, but one of Elon Musk’s major DOGE initiatives is a massive fire sale of federal office space. Despite forcing federal employees back to the office by abolishing telework programs, Musk and company want to unload a large number of unused properties and recoup that money for the budget, a process that could expand if worker purges continue.

That theoretical win-win, however, will soon come into contact with the realities of commercial real estate markets, which are particularly depressed when it comes to the very type of inventory the government wants to sell. Older office space is experiencing record vacancy levels, with owners struggling to refinance the buildings. Putting large amounts of it on the market could have dramatic consequences, including damaging the economy in cities like Washington, D.C. It could lead to widespread defaults in financial securities linked to commercial mortgages. And if unchecked, that could lead to broader pain.

“Every additional shock is painful,” said Stijn Van Nieuwerburgh, a professor of real estate and finance at the Columbia Business School. “I’m not sure they’ve thought this fully through.”

I'm pretty sure that the Apartheid Era Emerald Heir Pedo Guy™ never thinks ANYTHING fully through, and Trump's real estate experience is largely for entertainment venues, casinos and golf courses.

They brag about not thinking this fully through, so it is reasonable to assume that they have not done so. 

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A potential crash in the office sector of commercial real estate (CRE) has been a looming hazard ever since the pandemic, as increased work-from-home has lessened the need for such properties. The time-honored tactic of extend and pretend, where some loans get rolled over and the market waits out the problems, has so far mitigated the damage. But the warning signs are there.

Over 20 percent of U.S. office space was vacant in 2024, according to financial analysts at Moody’s, and this year is expected to be rocky as well. A growing number of older buildings (known as Class B and C offices by the lingo of CRE) are simply being torn down; one industry veteran lists about 30 percent of the entire office portfolio as “basically worth nothing.”

Also note that loans for CRE do not allow one to just make the payments to get through a rough patch.

Typically, they are 5 year loans that must be refinanced at the end of the period, and if the property value has dropped, then the bank will not refinance on the property and it will foreclose. 

Enough of this happens, and it is "Game over, dude!" both for the banks and for developers.

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Into this mess comes the General Services Administration (GSA), now staffed at the senior level mostly by Musk allies, ready to sell office space into a buyer’s market. There’s reportedly a list of more than 500 buildings on the way out, on the road to a proposed 50 percent reduction in overall space. “The intention of GSA and the whole federal government is to reduce the number of old buildings that are owned with high liabilities … in favor of newer leased buildings, which can be more flexible and are more modern, that have ways for teams to collaborate and have private spaces,” said Thomas Shedd, head of the Technology Transformation Services, a division of GSA, in a recording of a staff meeting on February 5.

This would be exactly the wrong strategy for the moment, as Van Nieuwerburgh explained. A reliable government tenant is the only thing making any building the government currently owns at all valuable. “If the government sells the building and also vacates it, that building will be close to worthless, especially in a market with a lot of vacancy,” Van Nieuwerburgh said. Maybe some buildings could be converted into apartments as a potential win-win, but those conversions are maddeningly complex and expensive, and would require selling at even bigger discounts to make the financing work.

Of course, given the history of both Trump and Musk (Mump? Trusk? whatever) we can also expect to see widespread abandonment of leased properties.

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GSA, however is also very interested in shedding leases, too. DOGE has already announced the cancellations of 22 leases as of February 2, with a savings of $44.6 million. The plan is to cancel leases on as many as 7,500 buildings in all, according to the Associated Press. GSA has even worked on canceling leases on offices for federal public defenders, something it cannot do because public defenders are part of the judicial, not the executive, branch.

But for the most part, the government is locked into its leases. Real estate analyst Trepp estimates that GSA can terminate up to 53 million square feet of office space between now and 2028, about 35 percent of its total. But the agency is setting its aspirational goals much higher than that.

Trying to cancel leases not up for renewal would trigger hefty fines, saving no money whatsoever. But the Trump-Musk history of stiffing creditors, pulling out of leases, and skirting accountability could come into play here. “They may just say, ‘We’re out of here. Come after me,’” one former CRE lawyer told Virginia Business. That would be very destabilizing.

"Very destabilizing," huh?  "Apart from that Mrs. Lincoln, how was the play?"

To quote Andrei Bonovia, "You arrogant ass. You've killed US!"