Pricing Government Contract Risk Premia: Evidence from the 2025 Federal Lease Terminations

Abstract

Are government contracts a safe investment? We investigate this question using unanticipated Department of Government Efficiency (DOGE) cancellations of federal leases as a shock to commercial mortgage default risk. Offices with DOGE-notified leases experience persistent net operating income declines exceeding 15%, with large, negative effects on CMBS prices and rental cash flows tied to nearby private-tenant properties in Washington, D.C. Spillovers are driven by increased vacancy from tenants with high exposure to procurement contracts involving disrupted federal agencies. Simulations of office property value losses from early lease terminations indicate substantial market-wide repricing of government contract risk.

Keywords: commercial real estate, government contracts, CMBS, lease contingencies, production externalities, credit risk

JEL Classification: G18, G21, H83, R38