Trump, Musk Face Obstacles in Downsizing Federal Offices

A massive endeavor to save tax dollars by scaling back the federal government’s workforce and its office space is likely to hit roadblocks in Chicago, real estate industry insiders say.

After vacating leases that are set to expire, terminating active contracts will prove difficult because government leases are often long-term and come with strict and expensive cancellation policies, experts said. Meanwhile, selling federally owned properties comes with its own set of challenges because they are often outdated or have niche uses or security concerns.

“It appears that the federal government has grabbed at the low-hanging fruit and terminated leases that were probably easier to terminate and were already going to expire,” said Nicole Fry, a real estate attorney with Benesch who practices in Chicago and Washington, D.C.

But focusing only on expiring leases will likely fall short of the White House’s own goals.

President Donald Trump and his advisor, Tesla CEO Elon Musk, reportedly plan to slash federal office space in Chicago by 50 percent, including selling off the Loop’s John C. Kluczynski and Ralph H. Metcalfe buildings. The full scope of properties being considered is unclear.

“Selling federal buildings is a much larger undertaking,” Fry said.

‘Just a pile of rocks’

Finding buyers for the Kluczynski and Metcalfe buildings, at 230 South Dearborn Street and 77 West Jackson Boulevard, could be a logistical nightmare. Demand for office is lagging as vacancy rates remain stuck at 25 percent. But also, the properties on the chopping block have highly specific security requirements because they are adjacent to the U.S. District Court for the Northern District of Illinois.

“They don’t want non-federally controlled property to have sightlines into federal courthouses,” said Prime Group CEO Mike Reschke, a veteran Loop developer. “I would suspect that those buildings will never be sold, for security reasons.”

It wouldn’t be the first time that security concerns have affected development around the courthouse.

Congress approved a $52 million plan to demolish three Government Services Administration-owned buildings at 202, 216 and 220 State Street for improved security for the adjacent courthouse, but that plan was reversed in August, in favor of an effort to conserve the historic buildings.

The latest plans for those properties, which range in height from four to 22 stories, are unclear. The GSA is accepting redevelopment proposals, but they must follow strict security protocols including eliminating windows facing the courthouse.

“If they’re doing all that for those little historic buildings to the east of the courthouse, why would anybody think that the federal government’s going to take the building across the street, running parallel to the federal courthouse, and sell it off to a private party?” Reschke said.

A representative from the GSA did not confirm which buildings or leases the government plans to vacate.

“GSA is reviewing all options to optimize our footprint and building utilization. GSA is actively working with our tenant agencies to assess their space needs and fully optimize the federal footprint,” a statement from the agency read.

When considering which federal buildings to sell, Trump and Musk have reportedly said they don’t plan to touch courthouses. That puts Chicago’s 1 million-square-foot federal courthouse off limits. Add in the office space adjacent to the courthouse that can’t be easily repurposed because of security concerns and the amount of difficult-to-sell space exceeds 3 million square feet.

What’s left is a hodgepodge of federal offices in and around downtown used by agencies like the postal service or the region’s branch of the National Archives. Repurposing such properties for the private sector is no simple task, said Darrell Crate, CEO of federal leasing REIT, Easterly Government Properties.

“Some of them may be converted to a hotel or residential because they have a unique charm. Some of them may be able to be repurposed into offices, and some are really just a pile of rocks that can be very expensive to demolish,” Crate said.

But it’s not impossible. The 601W Companies-owned Old Post Office building, at 433 West Van Buren Street, underwent an $800 million transformation into offices shortly before the pandemic. The property was converted to office space designed by Gensler and completed in 2019.

Quintin Primo’s Capri Investment Group and Reschke’s Prime Group started construction this year on the overhaul of the Thompson Center, a former government building used by the state of Illinois. The building will serve as Google’s Midwest headquarters and is already driving development interest in the surrounding area.

“The biggest demand in the central Loop right now, and what’s going to be the biggest demand, is supporting hotel and corporate housing for Google,” said Mark Reiter, founder of development firm 5M.

Releasing leases

Leases are easier to offload than the buildings the federal government owns. Although terminating existing agreements can be complicated.

“A typical example you’ll see is a 20-year lease with a 15-year firm term. If the lease is in firm term, the GSA cannot unilaterally cancel the lease. To do so unilaterally would be the equivalent of a government default,” Easterly CFO Allison Marino said in an earnings call this week.

Among leases that are set to expire, those used primarily for administrative purposes will be the easiest for the government to offload, Crate said. Others with more niche uses would be harder to market.

Easterly focuses on buildings used for law enforcement, defense and food safety, precisely because the properties have unique features that the government would have trouble finding elsewhere, he said. FBI offices, for example, have anti-ballistic glass and thick concrete walls embedded with mesh wire to prevent spying attempts. Those features, which increase the overhead of a building, are unlikely to entice a private company that can easily lease traditional office space in today’s over-supplied market.

Focusing solely on terminating leases is unlikely to meet the Trump administration’s downsizing ambitions.

The federal government leases about 1.3 million square feet of office space in Chicago, according to data compiled by The Real Deal. Even if the government terminated every single one of its leases in the city, it wouldn’t come close to meeting the president and Musks’ reported goal of reducing federal office space in the city by 50 percent. That’s because the federal government also owns over 5.3 million square feet of office space in Chicago, according to TRD’s data.

An uncertain market

In some cases, plans were already underway to consolidate space before Trump took office.

The GSA had been in talks to sell the William O. Lipinski Federal Building in River North. The U.S. Railroad Retirement Board that occupied the building was planning to move into the Metcalfe building, according to a report from the GSA last year.

The same report outlined a budget request for $37 million worth of renovations to the Metcalfe Building, which may be caught in Trump and Musk’s crosshairs.

The 28-story Metcalfe building was built in 1991 and contains offices for the Environmental Protection Agency, the Department of Housing & Urban Development, the Department of Agriculture, the Department of Health & Human Services and the Commodity Futures Trading Commission.

The GSA report stated that renovations were deemed necessary because, “it has never received major modernization funding. The systems and equipment are failing. The building requires investment to prevent failures which would prohibit the building tenants ability to fulfill their missions.”

Now, it may be up to a private owner to take on that work, if the building gets any interest from buyers at all.

One building that’s already set to be torn down and sold as a redevelopment site is an office at 2300 East Devon Avenue in suburban Des Plaines. The property, completed in 1968 and located near O’Hare International Airport, is owned by Easterly and leased to the Federal Aviation Administration. Because the FAA already has plans to vacate and move to a Rosemont building at the end of its lease in the next few years, Easterly plans to sell the Des Plaines property.

“The moment they move out, we will flatten the building the very next day, and we will sell the land to folks who are excited to buy it and redevelop it,” Crate said.

When owners choose not to demolish older buildings, like the 1970s-era Kluczynski Federal Building, brokers are left with a tough sell.

“If you’re talking about a building from 1974, one would imagine there might be a number of updates that would be needed to be able to compete in the current market,” Fry said.

It’s not uncommon for government-owned buildings to be outdated. The median age of federally owned buildings in Chicago is 77, according to GSA data compiled by TRD.

Even market players with no interest in trying to take on one of these buildings could feel the effects of their addition to Chicago’s beleaguered office market.

“I think what’s also very important in our encouragement to the U.S. government is not to dump all of those buildings on the market all at once,” Crate said. “They should slowly drip their inventory onto the market consistent with the absorption in the area, so that they don’t cause inefficiencies in the local real estate market.”