The national office market is unlikely to feel significant effects from reductions in federal office space despite the Trump administration’s decision to terminate 679 leases totaling 7.8 million square feet. According to CBRE, the General Services Administration, which leases just 1.7% of the U.S. office inventory across 1,800 cities, holds 69 million square feet of space. Even if all publicly listed GSA leases marked as terminated by the end of March are vacated, the overall office vacancy rate will rise by only 10 basis points. CBRE’s analysis further suggests that a 10% reduction in GSA-leased space would increase national office vacancy rates by just 20 basis points, underscoring the limited impact of these federal cutbacks.
While the overall potential impact is numerically small, it could pose moderate headwinds to a recovery in the office sector driven by improved demand and reduced supply. U.S. office vacancy fell for the first time in 18 quarters during the fourth quarter after stabilizing at 18.9% at the end of last year.
Any impact will be most evident in Washington, D.C., suburban Maryland and Northern Virginia, which have the highest concentrations of GSA-leased space, said the analysis.
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The GSA space reduction could also further exacerbate the bifurcation of the U.S. office market caused by weaker demand for Class B and Class C buildings and a preference for amenity-laden, newer and recently renovated buildings in prime locations. CBRE noted that relocating government agencies from federally owned space to available leased space could help reduce vacancy rates in many markets.
“As government-leased space is terminated and becomes available, we expect shadow space in quality buildings and connected locations to lease more quickly than space vacated in outdated buildings in fringe locations,” said CBRE. “This will exacerbate the glut of Class B/C space and put further downward pressure on rents.”
The report said that the impact of GSA building disposition on the office sector remains unclear. However, it said these buildings will unlikely be re-used as office space without significant improvements. Some of these properties could be targets of retrofit and adaptive reuse projects, which could positively impact specific markets and submarkets.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
