There have been 14 government shutdowns since 1980. 1995 is an outlier as the original shutdown lasted three days (in November) and an additional 21 days (in December). 2018 also saw an initial 3-day shutdown (in January) and set a record for the longest stretch (34 days) in December.
That lengthy shutdown reduced the U.S. GDP by $11 billion and an estimated 2,301 years of work. Small business loans weren’t approved, nearly $4 billion in tax refunds were delayed, the private sector created an estimated 120,000 fewer jobs, and the Office of Management and Budget (OMB) estimated losing $10 million in uncollected penalties and fees from late interest payments.
In some cases, the gap had little negative effect, with several shutdowns lasting only long enough for negotiators to meet and work a deal. Other shutdowns occurred over the weekend or overnight, having little impact on operations.
This year, another shutdown crisis looms. Should the government shut down at 11:59 p.m. on September 30, the country will once again feel its effects — effects that will be far-reaching and costly the longer the shutdown lasts. Here’s how the commercial real estate industry could be impacted.
The projected effect of the government shutdown on the CRE sector depends on several factors, including its length, specific agencies affected and overall state of the economy. Generally, we could see:
- Reduced demand for CRE as businesses and government agencies delay or cancel leasing and development projects.
- Uncertainty and market volatility make it more difficult for CRE investors and developers to obtain financing and conduct transactions.
- Delayed approvals of permits or other government approvals necessary for CRE development projects.
- Reduced consumer spending, which can hurt retail and other CRE sectors.
Additionally, a shutdown of the General Services Administration (GSA) could delay or cancel government leases, negatively impacting the office and retail real estate sectors. A shutdown of the Small Business Administration (SBA) could make it more difficult for small businesses to obtain loans, dampening demand for CRE.
We’ve been down this road before
According to the Department of Housing and Urban Development, the impact of this year’s looming shutdown on real estate depends on its length. Because it would start at the beginning of the month, closings and loan-related verifications and other processes typically occurring mid- to end-of-month might not be initially affected (or affected at all, especially if the government reopens quickly).
While some mortgage originators may have been able to plan for a potential shutdown and verify tax transcripts and social security numbers, other mortgage underwriters may not be so fortunate. Everything will be on hold until the SSA, IRS and USDA offices reopen. However, investors with a property on the market don’t necessarily need to exclude offers from VA or FHA borrowers, as all loan transactions require tax transcripts and SSN verifications.
Cash-rich CRE investors may find opportunities to capitalize on a purchase if a seller is cash-strapped and a current buyer hasn’t closed because the loan couldn’t go through. Without ready cash at hand, however, it may be challenging to move quickly.
But the last time the government shut down at the end of the month (Dec. 22, 2018 – Jan. 25, 2019), real estate businesses felt the impact. Tax transcripts weren’t able to be pulled, delaying closings. FHA wasn’t assigning case numbers. Realtors worry that flood certifications could be impacted this time, affecting people using FHA loans to purchase investment properties.
What Bankers Should Know
Past shutdowns have generally not had long-lasting effects on financial institutions. One could almost argue that the government shutdowns are practically a business-as-usual occurrence on Capitol Hill as the partisan divide widens to create more political gridlock. The gridlock always clears, financial regulatory agencies eventually receive funding (often outside the Congressional appropriations process), and normal functions resume.
But this year, thanks to the expiration of a key program and deeply entrenched lawmakers on both sides of the aisle, we could see more economic pain than during past shutdowns.
An important flood insurance program is about to lapse. If it does, the National Flood Insurance Program won’t be able to sell or renew flood insurance policies. Existing policies will remain in effect until their expiration date, but should the shutdown stretch into many weeks or longer, FEMA could run out of money needed to cover losses resulting from floods.
The results of this lapse could prove financially disastrous for home and business owners unable to purchase new NFIP policies. Property owners and renters currently insured by NFIP would also be unable to renew their policies. Having zero access to flood insurance would result in people relying on limited federal disaster aid and property buyers losing financing or having to pay high fees to hold interest rates. Also affected? Builders who may have to hold onto properties longer than planned, leaving themselves — and buyers — in the lurch.
More Economic Headwinds
The U.S. economy has faced more than its share of headwinds over the past three years — and this shutdown creates another. A more prolonged shutdown could see the economy shrink in Q4. Each week of a shutdown decreases quarterly annualized GDP growth by 0.1-0.2PP. The economy generally earns about half back once the government reopens and federal employees receive back pay.
A protracted shutdown could eliminate the justification for the Fed to hike interest rates again when it meets in November (and possibly December) since closure would also disrupt the data flow upon which the Fed depends to make its decisions. The October jobs report — with surveys completed the second week of the month — is vulnerable, as is the CPI.
The shutdown’s impact on the financial market centers on its dampening effect on economic activity, leading to downward pressure on Treasury yields. The degree of severity depends on the shutdown’s length. Risk assets could waver if macro uncertainty were added to the equation, pulling cash from risk assets and pushing it into money market funds and bonds.
The technical dimension, however, is this: Underlying liquidity conditions may tighten as the Treasury keeps issuing on bond markets but spends less of the cash raised. This occurrence could be an upside to ultra-short term rates. It’s likely not significant, but it might act like a counterweight (though not a dominating influence) to downward pressure on longer tenor market rates.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.