How the Government Shutdown Impacts CRE Sectors

After more than a month of standoffs and squabbling, the government shutdown has come to an end – at least for now. However, even if the temporary relief becomes permanent, policymaking and processes impacting the commercial real estate industry have been disrupted, leaving experts with some lingering concerns.

While governmental departments and programs with 2019 spending in place continued to function, the Treasury Department, HUD and the IRS were forced to cease or scale back regular operations. Most notably, this affected Small Business Administration loans, Federal Housing Authority financing programs and U.S. Census data.

The shutdown also had personal consequences for more than 800,000 federal employees who were furloughed or working without immediate pay.

In the grand economic scheme, reduced spending from affected employees and limited government function will negatively impact growth. Standard & Poor’s recently estimated that the shutdown could cost the U.S. economy $5.7 billion, and economists fear that consumer and business sentiment could decline overall.

From a commercial real estate perspective, the shutdown created an uncertain environment for investors. “All the fluctuations going on put a pause on companies deciding what long-term investments to make,” National Association of Realtors chief economist Lawrence Yun told the Commercial Observer. “Do they actively purchase a commercial property knowing there could be further disruption in the future? They could be more hesitant or go on a smaller scale.”

The office sector may see some decline in small business startups as a result of governmental issues, as the SBA does not process loan applications during a shutdown. This could affect startups looking to expand their office presence, as well as new ventures looking to open up shop. Forbes reported that small-business loan approval declined by nearly 20 percent during the September 2013 shutdown, and similar figures may apply now.

For hospitality properties, the shutdown depressed occupancy rates around national parks and federally funded museums. In St. Louis, this included tourism activity related to Arch visitors. While January is traditionally a slower month for this type of travel activity and the immediate impact may be limited, the threat of another shutdown and resulting travel complications remains a concern.

Similar issues carry over to the retail sector, as the contract employees and government staffers affected by a another shutdown could scale back spending. To combat this, some businesses, such as Whole Foods, have opted to create special offers or exceptions for impacted workers that will support traffic and build positive brand sentiment.

Across all commercial real estate interests, the advantages related to qualified Opportunity Zones have also been delayed. Established as part of the 2017 tax reform legislation, the Opportunity Zone Fund program promises substantial tax benefits for Qualified Opportunity Fund investments and allows for new development in designated areas – including numerous areas across the Midwest. Program information that was scheduled to be released in January is now expected to take at least another month, and investors and developers alike are left waiting.

Businesses that operate on government contracts could also feel the squeeze – not only from this shutdown, but also the threat of a renewed stalemate. Departments that represent about a quarter of the government’s $1.24 trillion in discretionary spending require new funding, which trickles down to contractors relying on their business.

Those businesses leasing office space to federal government agencies may also have to worry if the shutdown resumes. While they will likely receive rent payments, the timeline for this could be delayed based on funding negotiations and approval.

As the threat of another shutdown lingers, the commercial real estate industry should remain vigilant and adjust for potential repercussions. If you have concerns about the impact governmental shifts could have on your portfolio or business plans, reach out to  Intelica Commercial Real Estate. Our experienced professionals are tuned in to local and national issues, and can help you mitigate problems and maximize outcomes.