Trump May Sell Two-Thirds of DC Federal Office Stock

The federal government is considering offloading two-thirds of its office stock, sparking potential upheaval in the Washington, D.C., office market.

Han-Gwon Lung & Jordan B.
January 23, 2025

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Good morning. The federal government is considering offloading two-thirds of its office stock, sparking potential upheaval in the Washington, D.C., office market.

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PROPERTY MARKET

Trump Eyes Selling Federal Offices to Private Sector

Trump May Sell Two-Thirds of DC Federal Office Stock

L'Enfant Plaza office building

Just when D.C.'s office market thought it had seen the worst, the Trump administration is preparing to add the one-two punch.

The plan: The federal government is proposing to offload two-thirds of its office portfolio while the General Services Administration (GSA) considers canceling 70 million square feet of leased space in D.C. alone. The WSJ predicts some GSA assets could sell at steep discounts—up to 70%—putting pressure on nearby buildings.

Deteriorating: The GSA, which oversees 370 million square feet of federal office space nationwide, faces a daunting backlog of deferred maintenance. Years of funding cuts—estimated at nearly $1 billion annually—have left many buildings in poor condition.

Case in point: Some major properties, like the 1 MSF regional HQ in L’Enfant Plaza, have been vacant since 2018 and need up to $185 million in renovations. Federal offices in D.C. are shockingly underused, averaging just 12% occupancy in GSA-owned buildings.

Conflicting policies: Adding to the complexity, Trump’s executive order mandating federal employees return to full-time, in-person work could clash with these plans. Agencies will still need sufficient office space, raising questions about how reduced federal footprints align with increasing staffing requirements.

➥ THE TAKEAWAY

What’s at stake: The sell-off could flood D.C.'s struggling office market—already at a 21.5% vacancy rate—with aging, undervalued buildings, leaving landlords exposed. Meanwhile, opportunistic investors eye a chance to capitalize on distressed assets.

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✍️ Editor’s Picks

Seeking new leadership: Mark Carney steps down as Brookfield chair to pursue leadership of Canada's Liberal Party and potentially become the country's next prime minister.
Merging operations: KKR Group (KKR) will combine its $157B infrastructure and real estate operations to capitalize on growing synergies in sectors like data centers and logistics.
Mass land sale: Bidding opened on over 800 properties owned by notorious Chicago landlord Suzie Wilson, the city's largest land sale since the Great Chicago Fire, as part of her bankruptcy proceedings.
Foreign investment surge: Under Biden, foreign direct investment in the US reached a record high in 2024, benefiting sectors like CRE, with global investors eyeing quality assets across US markets.
Salvaging the situation: Goldman Sachs (GS) is exploring a $1.2B junk bond offering to support Medical Properties Trust (MPT) after tenant bankruptcies and significant financial losses.

🏘️ MULTIFAMILY

Rent growth projections: US apartment rent growth is expected to rise in 2025, though regional differences in supply, demand, and economics will result in varied performance nationwide.
Fiery obstacles: Rising CA insurance premiums, worsened by wildfires, threaten to derail LA affordable housing projects, already struggling with high construction costs and financing hurdles.
Manufactured dreams: GMF Group raised $250M in its latest funding round, continuing its investment spree in the manufactured housing sector with 43 new acquisitions.
Up-and-coming cities: CoreLogic’s latest analysis reveals that the majority of America’s fastest-growing housing markets are concentrated in the South, with Florida and Texas taking the lead.
Maybe not: UDR Inc (UDR), one of the nation's largest apartment REITs, sold a Williamsburg property at a loss after owning it for just six years, signaling mixed signals for the Brooklyn market this year.
Cooling down: Houston's multifamily market showed signs of slowing in Q4, with demand and rent growth taking a step back after a relatively strong start to the year.

🏭 Industrial

Happy shareholders: Prologis (PLD) delivered a stellar Q4 performance, more than doubling its net income thanks to a surge in industrial leasing following the November presidential election.
Placing big bets: JPMorgan (JPM) is financing a major data center project in Abilene, TX, with a $2.3B loan, a massive investment in the booming AI infrastructure space.
Big absorption boost: The Central Valley’s industrial market closed out 2024 with its biggest boost in absorption since the 2022 warehouse boom, fueled by significant new leases.

🏬 RETAIL

Prime opportunities: Facing rising rents and falling office demand, major retailers are buying properties in Manhattan's most coveted shopping corridors, becoming landlords to secure long-term control.
Home improvement: Home Depot (HD) is set to open a 105 KSF store in Celina, TX, as the suburb enjoys explosive population growth and increased demand for retail infrastructure.
Healthy growth: Smoothie King plans to open 105 new locations in 2025, building on a record-setting 2024 that saw 84 new stores and significant franchise expansion.

🏢 OFFICE

Decades of recovery: Downtowns across the US are showing signs of a post-pandemic recovery, but a full transformation of the office sector could take up to 18 years, according to CBRE.
Big bargains: Sentry Realty and 60 Guilders bought the Midtown South office building at 1370 Broadway for $75.5M, capitalizing on distress with a steep discount from its prior sale price.

🏨 HOSPITALITY

Hitting the market: Host Hotels & Resorts (HST) may sell more than 10 hotels valued at over $1B, including prominent properties like Grand Hyatt San Francisco, W Seattle, and Coronado Island Marriott.
Steady as she goes: Despite modest economic growth, US hotel fundamentals remained stagnant in 2024, with occupancy rates flat and rising costs pressuring profit margins.

📈 CHART OF THE DAY

The last 120 days have focused on rising Treasury rates. According to Apollo, "Long-term rates have diverged from Fed expectations and are now 40 basis points higher than predicted. This increase aligns with the rise in the New York and San Francisco Fed’s term premiums. Markets are concerned that higher long-term rates stem from fears over fiscal sustainability." One expert says higher for longer rates will likely depress transaction volume and compel lenders to assess difficult decisions on underwater CRE loans.