Easterly Government Properties was established with one target in mind: Acquiring, developing and managing Class A commercial property that is leased by the U.S. government.
When it was initially founded, the idea was that these buildings would provide stable, long term, high returns on investment.
And it did. The firm partnered with the government to supply mission critical agencies, such as the FBI, DEA, and FDA, with buildings to operate in. Now Elon Musk’s Department of Government Efficiency has come along, wielding a chainsaw to the federal government and firing federal workers in droves
For a company that focuses solely on government buildings, this would appear to be problematic. This week, however, the firm reported positive fourth quarter earnings, stressing that much of that success comes from the fact that many of the operations served are mission crucial, with key tenants relying on the spaces to perform essential government work.
The issue is that the Musk playbook has totally ripped up what can be called mission critical. If the government rethinks its entire real estate footprint it will ripple across the commercial property market and affect managers like Easterly.
Speaking to Institutional Investor, Darrell Crate, CEO of Easterly Government Properties, accepted that there would be “bumpiness as the company gets to the other side of this” but argued that while efficiency recommendations and problem identification can take place that it is going to take several years to implement the modernization program. Crate is also founder and managing principal of Easterly Asset Management, which has multiple affiliated asset managers.
“They [DOGE] are moving forward with real estate, they are not just terminating and getting out of everything that has to be renewed. An executive order was put out asking agencies to create an inventory of leases and space they may not need,” he said. “But that is not happening at the FBI or the DEA, or anything defense related.”
The FBI this week announced intentions to move as many as 1500 agents to field offices away from its headquarters in Washington DC, with plans that include small offices owned by Easterly in Greenbelt, Maryland. Easterly also owns multiple FDA buildings.
The assumption that the government will simply want, or be able, to rip up its contracts and walk away are largely unfounded, according to Todd Henderson, co-global head of real estate at DWS Asset Management. He said that although DOGE had identified around 100 leases around the country that they want to cancel, the reality is that contracts will instead be run off without being renewed.
“It is a contract, you can’t just show up with a check,” Henderson said. “They’re not looking to spend more money they’re looking to reduce costs.”
Easterly does not own any property in Washington D.C., despite the high concentration of government buildings in the city.
“I worry a little bit about vacancy rates longer term, if a third of the demand goes away that’s a real problem,” added Henderson. “That’s like a work-from-home problem, so we’re watching it very closely. ... and we’re going to see another idiosyncratic hit because of government leasing.”
Crate said he’s not concerned about changes and went as far as to suggest that DOGE’s actions actually provide an opportunity for the firm, with modernization and federal downsizing potentially playing directly into the hands of the company’s strategy.
“I’m fond of saying that we’ve been underwriting DOGE since before DOGE, because we’ve looked at every building through the lens of, ‘are we able to provide a modern facility to the government, are we able to facilitate their mission in that facility, does it have unique features that help them accomplish their goals or that taxpayers would approve of,’” he said.
“We’ve been working with the government for the better part of a decade and we really know how to work with them. I could not be more excited, because every year we give ideas to the U.S. government on how to improve a facility. With Doge people all of a sudden are receptive to ideas.”
Among its one hundred properties, Easterly owns FBI buildings in Salt Lake City and Pittsburgh, as well as a large veteran outpatient care facility in California. The longest lease is 20 years, with around five per cent up for renewal each year.
“FDA labs across the country are absolutely broken. We have now built three for them, but there are seven more to go,” said Crate, who added that the government ended up building a lab in Denver for three times the cost that Easterly would have incurred. “At the FDA facility in Washington State the roof is leaking, the thing’s a mess.” He said Easterly recommended that the government close down that lab and move it to available space it has in a building it is constructing in Atlanta.
“This is insane. Modernizing systems will allow people to be more effective, and I really hope that that kind of sticks to the ribs of government as they move through this.”
