By Peter Grant and Deborah Acosta

The Trump administration's move to terminate millions of square feet of federal leases and sell government buildings threatens to weaken a fledgling recovery in the U.S. office market, from California to Washington, D.C.

Elon Musk's Department of Government Efficiency has targeted nearly 100 leases at government agency offices for termination or consolidation. The Trump administration is also considering selling two-thirds of the federally owned office buildings that are empty or underused.

While DOGE is focusing on federal buildings throughout the country, Washington, D.C., is in the bull's-eye. The District faces the greatest number of closures, with 11 leases totaling 1.4 million square feet, according to a Barclays analysis released last week. That is just the first wave of cuts in a city where the federal government is the primary employer.

"You will see there's a lot of buildings in Washington that are going to go away," said Darrell Crate, chief executive of Easterly Government Properties, a real-estate investment trust that leases office space to the federal government.

The District's office market has been one of the hardest hit in the country, with a vacancy rate peaking at nearly 23% last year, according to CBRE Group. It started to show signs of stabilization last year, but a fresh wave of closures would renew pressure on the market.

The federal government leases about 150 million square feet of office space and owns over 450 million square feet. A large amount of the owned space is underused and badly in need of maintenance.

The federal government typically isn't able to end property leases before their maturity dates, so DOGE is focusing on leases with near expirations or those that include options to get out of leases early. That gives the government the ability to negotiate a more immediate departure, brokers say.

DOGE is expected to pick up the pace of office closures as the Trump administration moves to shrink the size of the federal government. The administration is also expected to accelerate the sale of surplus federal buildings, an effort that has been under way for years but is now expected to be a higher priority.

While government-owned or -operated space represents a small portion of the overall U.S. office market, the closures are expected to have an outsize effect in cities with a notable federal-government presence.

Government building sales and lease cancellations are another setback for the U.S. office market, which has been suffering one of its worst downturns since World War II because of high interest rates and looser workplace strategies.

In recent months, the market has shown signs of recovery as some companies have required more office attendance. But the government's termination of leases this year alone would have negative impacts in the New York, Los Angeles, Atlanta, Hagerstown, Md., and Martinsburg, W.Va., regions, according to an analysis by data firm Trepp. Ohio, which Barclays said has the second-highest concentration with 10 leases, could also take a hit.

For cities dependent on government workers, "this could lengthen the recovery timeline, cause a stall out in the rental rate recovery and cause vacancy rates to stay elevated longer than what we had hoped," said Stephen Buschbom, Trepp research director.

Building owners with many federal tenants already have felt the pinch -- and not just in the District. Easterly Government's stock is trading below $11 a share compared with over $14 in mid-October. The company leases space in a Buffalo, N.Y., building to multiple federal agencies. Two of those leases, with more than 50,000 square feet combined, were terminated.

"When I think about the government trying to be more efficient, they should get rid of space like that," Easterly Government's Crate said.

But clearly Washington, D.C., landlords are among the most vulnerable. Shares of JBG Smith, a real-estate investment trust that focuses on the D.C. region, underperformed the company's peers by about 11.5 percentage points in the fourth quarter of last year, according to real-estate-analytics firm Green Street.

Tenants in the District leased about 300,000 square feet more space than they gave back in the fourth quarter, the first time there was so-called positive absorption since the first quarter of 2022, according to CBRE.

But analysts say that they think the federal government's lease terminations will more than offset the positive effect of the Trump administration's requirement that more workers return to the office. When government agencies move out of buildings "it might not be as easy to find similar tenants especially for some of the older buildings," Barclays said.

At least one major real-estate project planned by the federal government might also be derailed. In 2023, the U.S. General Services Administration decided -- after a 15-year planning process -- to move the headquarters of the Federal Bureau of Investigation to Greenbelt, Md.

But President Trump made clear during his first term in office that he didn't want the FBI to move to the suburbs. Last year he posted on Truth Social that keeping the building in the District was "the centerpiece of my plan to totally renovate and rebuild our capital city into the most beautiful and safest anywhere in the world."

Since starting his second term this year, Trump has promised to become even more involved with the future of the District of Columbia. Speaking on Air Force One last week, he called for the federal government to take over the governance of the district.

"We should run it strong, run it with law and order, make it absolutely flawlessly beautiful," Trump said.

Write to Peter Grant at peter.grant@wsj.com and Deborah Acosta at deborah.acosta@wsj.com

(END) Dow Jones Newswires

February 25, 2025 05:30 ET (10:30 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.