Impact on commercial real estate

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When a government shutdown occurs, real estate watchers tend to focus first on the impact on the housing market. Thousands of home sales could be put on hold because the federal flood insurance program is no longer able to issue new policies. The Federal Housing Administration, Department of Veterans Affairs, and Department of Agriculture may delay or stop processing mortgage loans. Also, the IRS may not process tax returns or income verification documents as quickly.

But the impact on commercial real estate is much less immediate and far-reaching. The government shutdown will delay the release of government economic indicators. This creates uncertainty in financial markets and, as a result, in commercial real estate transactions, especially for small and medium-sized enterprises. It also deals a blow to investor confidence. Finally, but immediately, it causes a setback in consumer demand for certain areas.

According to a post from the Commercial Real Estate Alliance (CREA), potential impacts include:

Demand for CRE decreases as companies and government agencies delay or cancel leasing and development projects. Amid uncertainty and market volatility, it has become more difficult for CRE investors and developers to raise capital and conduct transactions. delays in approval of permits and other government approvals required for CRE development projects;

Due to the government shutdown, the monthly employment report for September from the Bureau of Labor Statistics was not released. This has implications for investors who need this type of data to make decisions about the state of the economy and interest rates.

If the shutdown continues, the Census Bureau will not release economic data on construction spending, housing starts or building permits. All of these are important to multifamily investors.

Market uncertainty, especially as it relates to federal programs, can result in tighter credit from lenders and higher risk premiums for transactions.

“Investors and lenders in general are particularly looking for stability, and political instability always makes them more cautious about investment decisions and lending,” said Ran Eliasaf, founder and managing partner of Northwind Group, a real estate private equity and debt fund manager. “We think the biggest risk we take on is political risk, both at the federal level, like a government shutdown, and at the local level, like the New York City mayoral election.”

Looking at specific sectors, retail and hospitality will be the first to be affected as they are completely consumer-driven. Employee furloughs and layoffs could reduce consumer spending, especially in areas with high concentrations of federal employees.

“I think this is a big risk,” said Christine Cooper, chief U.S. economist and managing director at KoStar, a commercial real estate information and analytics company. “Think about all the small retailers and coffee shops. If they lose customers, they’re likely to go out of business because their profit margins are so low. They can’t afford it, and some of them will close pretty quickly.”

There is a similar situation in the hospitality industry, where the closure of government services and national parks will impact tourism. Washington, D.C.’s tourism industry has already been hurt by the administration’s activation of the National Guard and other federal forces. This is just another attack on the city.

Transactions could also be delayed in skilled nursing facilities and senior care facilities. These, along with affordable housing projects, utilize financing from the U.S. Department of Housing and Urban Development (HUD).

“The lines (for) HUD loans will be even longer. Applications will not be processed,” Eliasaf said.

The federal commercial real estate market will be hit the hardest. Sales will be delayed or canceled because the federal government’s commercial real estate market is managed by the General Services Administration (GSA). Federal contracts, such as new leases and property maintenance agreements with tenants, must also wait.

“This is going to have an impact on deal making. Anyone who is negotiating from the Veterans Administration to GSA leases, which are government-sponsored leases, to even securing HUD funding, is definitely going to face some issues right now,” Eliasaf said.

Depending on how long the shutdown lasts, federal REITs that rely heavily on rent payments from the government, such as Easterly Government Properties and JBG Smith, could be affected.

Easterly said in an SEC filing earlier this year that “substantially all of our revenue is dependent on the receipt of rent payments from GSA and the U.S. Government Tenant Agency.”

Regarding the current closures, an Easterly spokesperson said, “In the past, we have remained open because our tenants’ jobs were considered essential to national security, law enforcement, and public health. Our portfolio is intentionally focused on these mission-critical facilities, and our long-term binding lease agreements ensure that rental obligations continue.”

If past closures are any guide, the construction sector will be hit as well. The 2013 government shutdown hurt federally funded infrastructure projects when the Environmental Protection Agency suspended permit reviews, according to a report from Construct Connect, an information technology company serving the construction industry. Contractors and trade professionals are mobilizing workers based on these permits.

And the 2019 government shutdown “frozen billions of dollars in federal construction spending, delayed approvals for Department of Transportation-related projects, and disrupted bidding schedules, putting pressure on subcontractors such as electricians, plumbers, and concrete specialists who rely on predictable project starts to manage labor, materials, and cash flow,” the report said.