When the newly formed Department of Government Efficiency (DOGE) began canceling federal office leases with private landlords, observers expected pushback from building owners and savings for federal budgets. Few, however, anticipated that the move would ripple through financial markets, driving up the cost of commercial mortgage-backed securities and reshaping investor assumptions about the stability of government tenants.
According to research by Yale University and the Rochester Institute of Technology, the cancellations injected new uncertainty into what had long been treated as some of the safest lease agreements in commercial real estate. “There’s always the risk that whoever’s in power in the government can make a change and wipe out those contracts,” said Cameron LaPoint, an assistant professor of finance at the Yale School of Management, in an interview with Yale Insights. “But that additional risk hadn’t been embedded in commercial mortgage-backed securities prices.”
Lease cuts were one of DOGE’s central tools to reduce government spending. Internal records from the General Services Administration showed plans to terminate nearly 800 contracts by the end of June, an effort projected to save about $500 million, as first reported by GlobeSt.com. Many landlords had counted on those agencies renewing agreements for years to come.
Not every canceled lease stemmed from DOGE’s initiative. The federal government has been shrinking its real estate footprint for more than a decade. But LaPoint found the agency’s rapid pace amplified concerns, particularly among property owners still grappling with higher vacancies in the wake of the pandemic.
To quantify the fallout, LaPoint teamed up with Soon Hyeok Choi, an assistant professor of real estate finance at RIT’s Saunders College of Business. Their study of the CMBS market found that DOGE’s lease cancellations and non-renewals were eroding a long-standing belief — that government contracts represented a virtually risk-free income stream. The researchers reported a “persistent” 4% decline in the value of first-loss CMBS bond tranches. Beyond that, they documented effects on bond prices, delinquency rates, and even on cash flows from nearby private-sector leases, as contagion risk spread.
The study also highlighted flaws in how risk was priced. Using arbitrage models of commercial lease contingencies, the researchers compared two otherwise identical properties. In one scenario, the probability of early termination was assumed to be zero; in the other, it was acknowledged as a real possibility. When early termination options were dismissed as irrelevant, rents were set too low, failing to reflect the actual risks involved in government contracts.
Simulation results suggested that exposure to early terminations could amount to property losses exceeding $575 million in Washington, D.C. alone—surpassing the projected taxpayer savings from canceled lease payments.
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