Impacts on commercial real estate

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When the government shuts down, real estate watchers tend to focus first on the impact to the residential market. Potentially thousands of home sales will be held up because the federal flood insurance program is no longer able to issue new policies; the Federal Housing Administration, Department of Veteran Affairs and Department of Agriculture might slow or suspend their mortgage processing; and the IRS might not process tax transcripts or income verification documents as quickly.

But the impact to commercial real estate, while not quite as immediate, is much more far-reaching. A government shutdown delays government data on the economy. It causes uncertainty in the financial markets and, consequently, commercial real estate dealmaking, especially for small businesses. It also hits investor confidence. Finally, but most immediately, it causes a pullback in consumer demand for certain sectors.

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

• Reduced demand for CRE as businesses and government agencies delay or cancel leasing and development projects.
• Greater difficulty for CRE investors and developers to obtain financing and conduct transactions amid uncertainty and market volatility.
• Delayed approvals of permits or other government sign-offs necessary for CRE development projects.

The government shutdown meant there was no release of the September monthly employment report from the Bureau of Labor Statistics. That affects investors who need this kind 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 and building permits. Those are all key for multifamily investors.

Market uncertainty leads to tighter credit from lenders and potentially higher risk premiums on deals, especially if they have anything to do with federal programs.

“Investors in general and lenders specifically look for stability, and when there’s political instability, it always creates more caution about making 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 to underwrite is political risk. It’s true for the federal level, like government shutdown, and it’s true for local, like the New York City mayoral election.”

Looking at specific sectors, retail and hospitality will see the quickest impact because they are entirely consumer driven. Consumer spending, especially in areas where there is a high concentration of federal workers, could drop as employees are furloughed or even laid off. 

“I think that’s a big risk,” said Christine Cooper, chief U.S. economist and managing director at CoStar, a commercial real estate information and analytics firm. “Think about all the small retailers and coffee shops. They have very slim margins, so they’re more likely to be disrupted if they lose their customers. They won’t be able to afford it, and you’ll see some closures in pretty short order.”

It’s a similar situation in hospitality, where closures in government services and at national parks will impact tourism. Washington, D.C.’s tourism has already been hit by the administration’s activation of the national guard and other federal troops. This is just one more strike against the city.

Skilled nursing facilities and senior care properties could also see deal delays. Those, along with affordable housing projects, use financing from the U.S. Department of Housing and Urban Development (HUD). 

“I think [for] HUD financing, the queue will get longer. Applications will not be processed,” said Eliasaf.

The federal commercial real estate market will take the hardest hit, as sales of those properties, which are managed by the General Services Administration (GSA), will either be delayed or stopped. Federal contracts, including new leases and property maintenance agreements with tenants, will also have to wait. 

“It’s going to impact dealmaking. Definitely anybody that’s negotiating a GSA lease, a government-backed lease, from the VA to even securing HUD financing is going to run into some issues right now,” said Eliasaf.

Depending on how long the shutdown lasts, REITs that cater to federal agencies, like Easterly Government Properties and JBG Smith that depend heavily on government rent payments, could be impacted.

In an SEC filing earlier this year, Easterly said, “substantially all of our revenue is dependent on the receipt of rent payments from the GSA and U.S. Government tenant agencies.”  

As for the current shutdown, an Easterly spokesperson said, “In past instances, our tenants continued to operate because their work is considered essential to national security, law enforcement, and public health. Our portfolio is deliberately concentrated in these mission-critical facilities, and our long-term, binding leases ensure that rental obligations remain in place.”

If past shutdowns are any guide, the construction sector will be hit as well. A report from ConstructConnect, an information and technology company for the construction industry, notes that the government shutdown in 2013 hit federally funded infrastructure projects, because permit reviews by the Environmental Protection Agency stopped. Contractors and trade specialists rely on those permits to mobilize crews. 

And, the 2019 shutdown “froze billions of dollars in federal construction spending, stalled approvals for projects tied to the Department of Transportation, and disrupted bidding timelines, which squeezed subcontractors like electricians, plumbers, and concrete specialists, who depend on predictable project starts to manage labor, materials, and cash flow,” according to the report.