On Saturday, December 22, 2018, the United States Federal Government began its current shutdown. The shutdown of the Federal Government is a process in which both the House and Senate cannot agree to terms on a spending bill for the fiscal year. However, only a portion of the government is shut down; those agencies and activities that are deemed essential, like law enforcement, remain operational.
A total of 380,000 federal employees have been furloughed from their jobs and another 420,000 are working without immediate pay. Reduced spending from 800,000 government employees can begin to have an impact on commercial real estate owners, especially in areas like Washington D.C. where government employees are critical to the day-to-day economy.
The multi-family sector may begin to see a slowdown in the processing of loans for housing projects as the Department of Housing and Urban Development becomes short staffed during this shutdown. Although the Federal Housing Administration will continue to create loans under its single-family home program, it will not be creating any new loans in the multi-family program.
The office market could begin to see a slowdown in planned lease-up of space should the Small Business Administration, which provides loans to start-up companies, continue to remain inactive during the shutdown. Additionally, some businesses that rely on government contracts are no longer receiving their funding, which could make it challenging for those businesses to make their near-term rent payments on time. Landlords with space occupied by various government agencies whose leases are administered by the General Services Administration (the “GSA”) do not need to be concerned at the present time. The Federal Buildings Fund, which is the rent pool for GSA, is still solvent and rents through December 2018 have been paid. GSA reportedly believes there are sufficient funds to pay January rent (due February 1st) as well. The rent owed for February is where the uncertainty may begin to set in.
Retail establishments in areas with high concentrations of federal government employees who are not receiving paychecks due to being furloughed will likely feel pressure during this shutdown period as well.
A shutdown ending in the next couple of days would likely have very little impact to the sectors mentioned above. A shutdown that continues into February or beyond would require the government to make drastic decisions to avoid significant disruption not only to the commercial real estate market, but also to the greater economy.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Portfolio Management, GSA
Boyd Watterson Asset Management, LLC