The Trump administration’s efforts to shrink the federal government has so far touched about a dozen real estate investment trusts, but in a small way.
CoStar News matched up 11 publicly traded REITs to the federal government’s data on nearly 800 lease cancellations through Wednesday. The terminations affect just 13 buildings in the combined REIT portfolios of more than 11,500 properties, according to CoStar data. The office buildings identified for terminations are well leased too, with CoStar showing an average leased percentage of 94%.
This year has been tough for REITs and the stock market in general as President Donald Trump’s changing tariff policy and other factors have driven market volatility.
The 11 REITs together have seen their stock prices drop an average of 6% since the first day of trading this year through Friday. The performance lags the Financial Times REIT index over that time frame, which was up 2%. Meanwhile, the Dow Jones Industrial Average is down 2% this year.
The decrease in stock price is worse for the eight REITs that primarily own office properties on the Department of Government Efficiency’s list of lease cancellations. Those REITs have seen their stock price value fall 9% this year. Two other REITs affected primarily own industrial properties, and one is a healthcare REIT. The average stock price change of those three REITs is up 3% as of Friday.
Many of the office REITs affected by the lease terminations had already initiated efforts to sell off poorly performing properties. The government’s actions will likely enhance those initiatives for REITs and other owners as well, industry professionals say.
Part of the office REITs’ stock price decline stems from recent decisions by some to lower dividends because of the struggling U.S. office sector, according to David Auerbach, chief investment officer of Hoya Capital Real Estate.
“We have regular conversations/dialogue with many of the office REITs and of course they are going to put a pretty bow on it and present the best-case scenario,” Auerbach told CoStar News in an email. “That being said, I would say this isn't the first rodeo of volatility in federal government office leases and buildings. If anything, I think it’s going to provide the ‘best of the best’ an opportunity to acquire some desirable assets at great prices.”
During the first week of March, the General Services Administration, the government’s real estate manager, published a list of 441 "non-core" properties that were purportedly identified to be disposed of by various means. That list was subsequently removed from the GSA’s website, but observers expect many of them will eventually be placed back on the chopping block.
The scenario Auerbach and others foresee is already happening, according to Josh Feldman, managing principal of brokerage firm Feldman Ruel in Washington, D.C.
“We haven’t seen any of the [federally affected] properties hitting the market yet, but we have certainly heard from buyers looking to purchase a number of different property types in the area at a discount in the hopes that the federal government layoffs and restructuring are going to drive the market down,” Feldman told CoStar in an email. “That may eventually be the case, but nothing happens quickly in terms of the market responding to outside forces. So, assuming the current course remains the same, we very well may end up in a situation where supply of available properties outpaces demand resulting in a reduction of values across the board.”
A new CoStar analysis suggests possible targets for government lease terminations could put more than 200 buildings at risk of financial distress, even if the cuts would be too geographically broad to produce a meaningful change in vacancy in most of the markets where the affected buildings are located.
Washington impact
Two of the REITs with properties tied to federal lease cancellations are based in the D.C. market, and have substantial holdings there: JBG Smith Properties and COPT Defense Properties.
Kevin Connolly, executive vice president at JBG, declined to comment but referred CoStar News to a letter the REIT sent to shareholders.
“While moves by the new administration to shrink the size of the federal workforce may present a regional headwind, they represent only a portion of demand for our portfolio of largely new assets with a diverse base of residents, the majority of whom are concentrated in the private sector,” the letter said.
Still, JBG acknowledged the administration’s efforts add uncertainty.
“The federal hiring freeze, (which notably exempts national security employees), the federal employee buyout offers, and the latest executive order calling for a reduction-in-force and limits to backfilling attrition all represent headwinds to the regional economy,” the letter said.
In its year-end earnings call last month, COPT officials told analysts the REIT has minimal exposure to the federal agencies whose leases were terminated. The vast majority of COPT’s revenue comes from national defense activities of the U.S. government. The REIT did not respond to a request for comment.
The Department of Defense is not among the top 15 federal agencies identified by the administration as having leases canceled.
REIT analysts at the bond-rating firm KBRA issued a report last month saying that the administration’s cuts may offer Easterly Government Properties opportunities to purchase federal buildings put up for sale. Easterly said it stands ready to serve.
"While we can't share specifics on active procurement processes within our buildings, we're witnessing a strong demand from federal agencies to transition their operations away from Washington, D.C. and into facilities like ours across the country,“ an Easterly spokesman said in an email. “We don't own any real estate in Washington and roughly 95% of our portfolio is in firm-term. Just last month, we renewed our lease to the GSA on our multi-tenant facility in Portland, Oregon, which will continue to enable tenants such as the U.S. Army Corps of Engineers to execute its enduring missions."