The commercial real estate market is undergoing a significant shift as companies and the federal government push employees back into offices. While this trend has fueled a recovery in office space demand, a new development could disrupt the market. The Department of Government Efficiency (DOGE), a newly established federal agency led by billionaire Elon Musk, has started reducing the government’s office space footprint. This move threatens to flood the market with older, less desirable buildings, potentially slowing the recovery of the office sector.
A Rebound in Office Demand
Over the past few years, remote work reshaped the workplace landscape, leading to a decline in office occupancy. However, major companies like JPMorgan Chase and Amazon have recently mandated full-time office returns. The federal government, under the Trump administration, has followed suit, requiring thousands of employees to return to in-person work full-time or resign.
As a result, demand for office space has risen nearly 40% between 2022 and 2024, according to a report from VTS, a commercial real estate management firm. If this pace continues, VTS predicts that office demand could return to pre-pandemic levels within the next four years.
Charlie Dougherty, a senior economist at Wells Fargo, noted that rising office attendance is linked to a weakening labor market. “Workers don’t have the same type of bargaining power they once did,” Dougherty explained. With job growth slowing, companies are finding it easier to require in-office attendance.
DOGE’s Disruptive Influence
Despite the recovery, the office market’s stability is now in question due to DOGE’s aggressive cost-cutting measures. The agency, which was created by Trump last month, has begun terminating thousands of government office leases. The General Services Administration (GSA), which manages federal real estate, has been advised to cancel 300 leases per day, focusing first on lower-quality buildings.
DOGE confirmed on X (formerly Twitter) that it has already canceled dozens of leases in the past two weeks. The federal government currently leases nearly 150 million square feet of office space nationwide, paying over $5 billion in annual rent. If enough leases are terminated, a surge in vacant office buildings could put downward pressure on commercial real estate prices.
Darrell Crate, CEO of Easterly Government Properties, a company leasing 100 buildings to the federal government, predicted a sharp increase in available office space. “Over the next five years, we’ll see more buildings being repurposed into retail or residential spaces,” he said. “Some will put pressure on the office market, particularly in Washington, D.C.”
Winners and Losers in the Market
While some areas of the office sector are recovering, others continue to struggle. High-end Class A office spaces—newer buildings with luxury amenities—have seen soaring demand, particularly in New York City, where rents have reached all-time highs. Companies are now prioritizing high-quality spaces to attract employees back to the office, often including fitness centers, food courts, and other perks.
However, lower-tier Class B and C buildings face ongoing challenges. Many of these spaces remain vacant, and their value has plummeted. A striking example is the former Ameriprise Financial Center in downtown Minneapolis, which was purchased for $200 million in 2016 but resold last month for just $6.25 million—a staggering 97% decline in less than a decade.
According to Scott Homa, head of Americas property sectors research at JLL, the demand for top-tier office spaces highlights a “flight to quality.” Companies want premium locations and modern offices, leaving older, outdated buildings behind.
The Future of Commercial Real Estate
Although most cities have avoided the feared “urban doom loop”—a cycle where declining office demand leads to economic deterioration—about 20% of all office space remains vacant, according to Trepp, a commercial real estate data company.
The next five to ten years will be critical for the commercial office market. The trend of government lease terminations may flood the market with vacant buildings, while businesses continue gravitating toward premium spaces. The future of lower-quality office properties remains uncertain, with many likely being converted into residential or mixed-use developments.
As DOGE continues reducing the government’s office footprint, the commercial real estate sector faces both opportunities and risks. While high-end properties thrive, older office buildings may struggle to find new life in a rapidly evolving market.
