The federal government shutdown that is now rapidly approaching the one-month mark is creating both direct and indirect ripple effects on the commercial and residential real estate sectors.
The government shutdown affects those departments that did not already have 2019 spending in place, namely Agriculture, Commerce, Homeland Security, Housing and Urban Development (HUD), the Interior, State and Treasury. An estimated 800,000 federal employees have been furloughed or are working without pay, while the White House's insistence on getting funding for the border wall has also halted funding to government contractors working with those agencies. Although that shadow workforce of government contractors is more difficult to track, a recent New York Times article reported that the federal government paid out an estimated $465 billion in federal contracts in 2017.
“I think this is more of a short-term operational issue. I don’t think valuations are going to be materially affected,” says Heidi Learner, chief economist at real estate services firm Savills Studley. Hopefully, it will be business as usual once the agencies reopen, albeit there may be a large backlog of processing that needs to be done, she adds.
The FDIC and Federal Reserve remain open and operating, which will be key in maintaining regulatory oversight over the banking industry. The three agencies affected by the shutdown that are most directly relevant to the real estate industry are the Treasury Department, HUD and the IRS, which among other things includes Small Business Administration (SBA) loans, Federal Housing Authority (FHA) financing programs and U.S. Census data.
One of the concerns that is growing along with the duration of the shutdown is how it will weigh on economic growth, as well as consumer and investor confidence. “The bigger concern is the consumption, because it is not only the 800,000 workers that have been furloughed or are working without pay, but also the government contractors,” says Learner.
So, far there have been no signs of consumers or businesses putting major purchases on hold. “One of the ironies is that a lot of the economic data that would tell us how the economy is doing, are not being released,” says Learner. For example, retail sales that were scheduled to be released Jan. 15th are not available, because the U.S. Census Department is closed. “So, some of the real time measures of the impact the shutdown is having won’t necessarily be obvious until after the shutdown ends,” she says.
“Apart from this very human toll on nearly 1 million workers and their families, it is eroding confidence in the ability of Washington to move things forward, whether it is the evolution in tax reform, changes in regulation or infrastructure investment,” says Sam Chandan, associate dean of the NYU School of Professional Studies Schack Institute of Real Estate. People are wondering what the implications of the shutdown are, how long it will last and how it could impact the economy in the long term. “That anxiety among consumers generally may be associated with a pullback in discretionary spending, and that would have broader implications for the economy,” says Chandan. “So, it is a source of concern for us and something we need to continue watching.”
Another concern is that the economy is at a juncture where it is important to be looking at data to make assessments on how different market sectors are performing, Chandan adds. Some of the data is not available due to the shutdown. The Department of Labor, including the Bureau of Labor Statistics, is operating as usual and expects to follow its announced release schedule on employment data. However, other key metrics are not available. In addition to retail sales, the U.S. Census Bureau missed its Jan. 9th release date on international trade data.
People generally feel that there will be a resolution within the next several weeks, although one can’t rule out the possibility of a protracted shutdown, notes Chandan. The shutdown also highlights what looks like unprecedented dysfunction in Washington. “There are concerns around whether important legislation and regulatory initiatives will see any real progress over the last two years of the current administration,” says Chandan.
Here's a breakdown of the shutdown’s impact on various real estate-related agencies and sectors:
GSA lease obligations
One of the big questions for landlords surrounding the government shutdown is if rent checks will continue to roll in as usual. A number of operations at the General Services Administration (GSA) are affected due to the lapse in government funding. GSA provides workspace for over one million federal employees through more than 8,700 owned and leased properties. The agency began furloughing non-essential employees on January 7th.
The GSA does have access to “carryover funds” that allow the agency to continue its real estate functions during the shutdown. Most of the uncertainty surrounding this shutdown's effect on GSA's leased portfolio depends on how long the lack of funding will last. A shutdown that extends into February would require the government to take “unprecedented steps” to fund its ongoing rent obligations to avoid significant disruption and consequence, according to a statement written by Norman Dong on behalf of the National Federal Development Association (NFDA). Dong is a managing director at FD Stonewater and is the Former Commissioner of the U.S. General Services Administration, Public Buildings Service.
Other impacts noted in the NFDA Statement include:
- The shutdown will likely stall any pending acquisition or lease deals that were in progress. In most instances, the GSA is not allowed to enter into any new contracts during a shutdown that would increase its financial obligations.
- The impact on progress for new build-outs, tenant improvement projects and build-to-suit projects will vary by project, depending on whether those projects have been approved and funded.
One real estate sector that could see some immediate, short-term impacts of the shutdown is the hotel sector. Research firm STR is expected to release its latest weekly hotel data on Thursday morning for the week ending Jan. 12th. The research firm does not expect a notable change in national hotel occupancy levels. However, it is likely that there will be a noticeable impact on the Washington, D.C. hotel market, notes Jan Freitag, a senior vice president at STR Global.
In addition, it is possible that some hotel markets adjacent to the national parks could see a decline in occupancy. However, one positive in the timing is that January is typically a slow travel month for park visits, says Freitag. It remains to be seen whether a prolonged shutdown and long lines at airport security checkpoints will result in a pullback in both business and leisure travel, but that is something that is on the table, he adds.
Guidance that was expected to be released in January now likely won’t be issued for at least another month. “There is tremendous interest in our industry in qualified Opportunity Zones, and we now anticipate a delay in clarification from the Treasury Department on some of the important questions that need to be answered,” says Chandan.
The SBA will be inactive during the shutdown due to lack of funding, meaning no assistance or approvals will be issued on new 504 loans for owner-occupied buildings or 7a loans for business acquisitions or expansions.
About 95 percent of HUD workers have been furloughed with only an extremely limited number of employees available to answer emergency questions. All HUD regional and field offices, along with the HUD headquarters, are closed with limited exceptions. For example, rental assistance contracts that expire won’t be able to be renewed until the agency reopens. “I don’t think it has any impact on valuations, but in the short-term it could make operations for some of the private owners of rental housing, whether it is for low-income citizens or the elderly, a little more challenging,” says Learner.
Fannie Mae & Freddie Mac are not affected by the shutdown and will continue normal operations without interruption. Although they are both government-sponsored entities, they are not government agencies. Systems and business functions will be open as usual for all selling and servicing functions.
Housing market and residential lending
On the housing side, single-family residential is feeling the brunt of the government shutdown. Lenders and servicers are doing all they can to minimize the impact on homebuyers and borrowers. However, as the shutdown drags on, the impacts on individual families and the housing market in general become more severe. Closings are being delayed, home sales and purchases are falling through, and existing borrowers are struggling to make their next payment, says Pete Mills, senior vice president, residential policy and member services at the Mortgage Bankers Association (MBA).
According to a report by Moody’s Investors Services, “the shutdown is negative for all residential mortgage lenders, which face an increased risk of missing red flags on borrower quality, lapses that could lead to loans with higher risk of losses.” Lenders will need to create manual workarounds to replace origination processes such as validating social security numbers that may result in errors or, in extreme cases, instances of fraud.
Moody’s also noted that credit risk was neutral for outstanding residential mortgage-backed securities and new RMBS. According to the report, future RMBS deals are unlikely to include loans with material process errors, such as missing employment verifications, because such issues would either be cured after the shutdown and before securitization or flagged by preclosing due diligence.