Massive Federal Office Space Cuts Jeopardize $15.6B in CRE Loans Article originally posted on Globe St. on February 26, 2025 The Trump administration’s recent directive to the General Services Administration (GSA) to significantly reduce federal office leases has sent ripples through the commercial real estate market. This cost-cutting measure, aimed at trimming as many as 300 leases per day, represents a potential shift in billions of dollars of office market value. According to a new report by KBRA, the current conditions are fluid, and outlooks remain uncertain. The GSA leases account for approximately $28.7 billion of the $350.6 billion principal balance of CMBS and CRE CLO loans as of February 18, 2025. These leases encompass 173.6 million square feet of space across 6,483 buildings and 7,535 leases, predominantly office space. The impact of this decision is substantial. About 13.8 million square feet of GSA leases secured 201 loans with an outstanding controlled loan balance of $15.6 billion. This served as collateral in 195 of 513 KBRA-rated transactions, with an average exposure of 15.2% loan balance. In cases where GSA held leases, they represented an average of 17.8% of the expected loan collateral square footage. The situation is further complicated by conflicting information regarding federal employee work arrangements. While the Office of Management and Budget claims that 54% of the 2.28 million federal civilian employees work on-site, other sources suggest the figure is closer to 6%. This discrepancy raises questions about the potential impact of full-time return-to-work directives on space utilization. Adding to the uncertainty, the Trump administration has reported that 75,000 federal workers accepted buyouts, with the potential for up to 200,000 probationary employees to be laid off. This reduction in the workforce could offset any positive effects that a return to office might have on nearby retailers and restaurants. KBRA’s analysis of GSA exposure across 195 CMBS transactions they rated, including conduit, single-asset single-borrower (SASB), large loan (LL), and CRE CLOs, revealed that 44 of the 201 loans, representing a $2 billion balance, had at least 25% of their square footage leased to the GSA. Moreover, 29 loans had a GSA exposure of at least 50%. Several prominent properties in Washington, D.C. are significantly impacted by this situation. These include the Pentagon Center (100% leased to GSA), Parklawn Building (72.9%), Constitution Center (39.8%), Four Constitution Square (100.0%), Federal Center Plaza (99.1%), Three Constitution Square (99.0%), 717 14th Street (100.0%), 3300 75th Avenue (100.0%), and Liberty Park at Tysons (84.4%).