Elon Musk’s purge of nationwide federal properties owned and leased by the U.S. government is causing ripples in South Florida’s commercial real estate market.
Already, a handful of federal office buildings in Miami and West Palm Beach could be hitting the market, and a couple of Miami-Dade and Broward leases have been canceled, as Musk’s Department of Government Efficiency, or DOGE, slashes through government real estate.
Other properties, such as the FBI headquarters in Miramar and a 1960s office building in downtown Miami, could be prime targets for redevelopment if the sites end up on the chopping block, experts say.
“In our market, it could create opportunity because oftentimes these government buildings are in prime locations, and usually very well under market value, like some of these old post office buildings are smack in the middle of downtowns where they do not belong anymore,” Ben Jacobson with Delray Beach-based Forman Capital, told The Real Deal. “This made sense 70 years ago, but today you could make a big profit.”
Culling space from nearly 100 leases across more than six dozen properties in the tri-county region is going to be trickier. The feds may run into clauses that require payments to landlords, or face lawsuits from property owners seeking to enforce guarantees against early lease terminations. The government’s decision to vacate buildings also could hit an office market already struggling with economic headwinds. Finding new tenants takes time, especially when the influx of out-of-state companies has slowed.
“The urban office, in good locations, in newer buildings, I think will be fine,” said Jaime Sturgis, founder of brokerage Native Realty. “The suburban office is challenging; [it] has been for a while.”
DOGE’s ever-evolving list of targeted properties
On Tuesday, DOGE directed the General Services Administration to put 443 “non-core” buildings the government owns in 47 states on the market, which collectively span 80 million square feet. The sell-off will generate about $430 million in annual operating costs savings, according to GSA.
But the list was scrapped and replaced with a “coming soon” message by Wednesday morning.
Led by Musk, the world’s wealthiest person, DOGE is moving swiftly, with its plans and estimated savings ever-changing. The DOGE website’s information has also been plagued by mistakes, The New York Times reported.
In South Florida, the U.S. government owns 10 buildings, including three office buildings and the FBI headquarters in Miramar. The remaining six properties are courthouses and prisons, which reportedly will be left unscathed from the cuts.
Government leases also are on the chopping block. The feds have 90 federal leases across 79 buildings, according to an analysis by TRD. So far, DOGE cuts resulted in two terminated leases in Hollywood and Homestead.
Among the government-owned properties that briefly appeared on the GSA’s list on Tuesday is the historic David W. Dyer Federal Building and U.S. Courthouse in downtown Miami, which is leased to Miami Dade College for another 106 years.
The building is currently undergoing a $60 million renovation to “preserve its historic architecture while creating a vibrant hub for innovation, technology, and the arts,” said Miami Dade College COO Maryam Laguna Borrego in a statement. The new spaces will feature new classrooms, labs, galleries and community spaces, Laguna Borrego added. The college has not received any notices from GSA or DOGE, she said.
Some South Florida commercial real estate insiders wouldn’t be surprised to see the Dyer property hit the market, but buying the site would only make sense if the building could be demolished and redeveloped.
“If we’re talking about what makes financial sense, I don’t know if [educational and institutional] uses are the best ones,” said Forman Capital’s Jacobson. “But I don’t know a lot of people who would want to buy that building. Can it be repurposed for multifamily? I don’t know.”
Taking stock of other federal properties
Brickell Bay Plaza, a nine-story building on a 1.4-acre site in Miami’s booming Brickell neighborhood, is arguably the federal government’s trophy asset in South Florida, commercial brokers say. The GSA originally announced the Brickell building for sale in December, prior to DOGE starting its slashing. It houses offices for the Coast Guard, as well as the departments of labor and contract compliance, and housing and urban development.
“That’s an unbelievably valuable piece of property,” said Native Realty’s Sturgis. “Its current use is “certainly not its highest and best.”
The maximum allowed height on the site is 48 stories by right, although a developer can likely build much higher by contributing to city public benefits such as a park or affordable housing or through the state’s Live Local Act.
“That’s probably going to be mixed-use development eventually. It could be apartments, condos, office, hospitality,” said Dominic Montazemi with Cushman & Wakefield.
The one-story, 84,300-square-foot Social Security Administration building in downtown West Palm Beach also appeared on the GSA’s temporary “non-core” assets list.
“If the GSA has an RFP [request for proposals] to sell this, Steve Ross probably already knows about it and probably will be the highest bidder,” said broker Miguel Pinto of Apex Capital Realty.
Last year, Ross stepped back from Related Companies, the New York-based firm he founded more than 50 years ago, by carving out its southeast division and forming Related Ross. As the preeminent player in West Palm real estate, Ross has a guiding hand in shepherding the city’s evolution in terms of industries, education and housing. The billionaire raised funds for a planned Vanderbilt University outpost in the city –– a campus that’s slated to rise a block south of the Social Security building.
“They may add it to the campus itself,” said Cushman’s Christopher Lentz. “If they are able to add to it, it would increase the value of the project.”
However, a private takeover of the Social Security building is complicated since the property is adjacent to a federal courthouse. The U.S. government prefers that surrounding private buildings do not have sightlines into courthouses, according to published reports.
What can federal buildings sell for?
Exactly how much properties can sell for remains in question. The GSA’s process calls for first offering buildings for public uses such as homeless shelters, then to state and local governments. If they aren’t interested, then the GSA would go to the private sector through a sealed bid or auction.
Although the market for development sites has recovered from the lowest prices in 2023, it’s nowhere near its high point of the two earlier pandemic years.
“Is there an argument that they would have been better off selling in 2021? Yeah,” Lentz said. “Land can basically go from being incredibly valuable in a bull market to incredibly invaluable in a bear market because of carry costs.”
In West Palm Beach, the closest comparable for a development site deal is New York University’s $33 million purchase of a nearby 0.6-acre site in downtown West Palm last year, Pinto said. If indeed that’s the gauge, the 7-acre site that is home to the Social Security offices and courthouse would break down to $55 million per acre. (It’s unclear how many acres of that property the Social Security building sits on.)
Redevelopment of government buildings isn’t the only choice.
Developer Asi Cymbal is seeing office-to-residential conversions on the horizon, a niche common in New York that so far hasn’t taken hold in South Florida.
“The challenge to retrofitting office to residential typically are the long spans between the interior windows and the corridor, meaning if the distance between the exterior window and the core is too deep, you may have wasted space in converting it to residential,” said Cymbal, who worked on conversions in New York and now co-leads Miami-based Cymbal DLT. “Residential likes light and air and doesn’t need as big of a core and back of the house as offices.”
Bert Checa, of Lee & Associates, has a different viewpoint. The 16-story, 256,400-square-foot Claude Pepper Federal Building in downtown Miami, home to IRS, U.S. Justice Department and Customs and Border Protection offices, as well as the FBI building in Miramar could be repurposed as medical college campuses or other technical schools.
“There’s a couple schools like Lifeline [University] and Kaiser [University] that are looking for other campuses. They typically look for freestanding buildings with parking that are located in a high-density demographic area so they have a higher student pool,” Checa said. “I think those are probably the best sectors to steer these buildings to. I think the [corporate] office use sector already has too much competition.”
The trouble with leases
Scoring the government as a tenant is good news for landlords. Leases generally require letters of credit through which tenants guarantee payment in case the agreement is terminated prematurely. That payment could be for the remaining term on the lease; a kill fee, allowing the tenant to pay a flat fee to exit the agreement early; or for another pre-agreed upon amount, brokers say.
“There’s no better guarantee than the federal government’s guarantee,” said Pinto, the Apex broker. The landlord “goes to the bank with that letter of credit and says, ‘Hey, the tenant defaulted, bank, give me the money.’”
In some cases, landlords may need to resort to lawsuits to enforce guarantees, Sturgis said.
DOGE’s website lists the Bureau of Indian Affairs office in Hollywood and a National Park Service office in Homestead among leases on the chopping block.
In the current climate of higher interest rates, skittish lenders, higher insurance costs and an office leasing slowdown in some submarkets, it would be an extra blow to some landlords if they lose their government tenant.
The feds often take large blocks of space, sometimes as an anchor, and are generally a coveted tenant, considered “safe,” Sturgis said.
If the “federal government reneged on the deal, there’s financial harm caused to the landlord. The income stream is not there, and they need to refit the space,” he said. “That takes time and money. What landlords perceived to be a very risk-free return with that tenant has changed.”