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How Will the Government Shutdown Impact US Office Markets?

January 17, 2019 | by Viveka Krishnaswamy

The current government shutdown is now the longest in US history, overtaking its predecessor by 5 days and counting. As federal funds dry up or remain inaccessible, there is worry that the shutdown’s economic footprint will be more severe than anticipated. The White House recently reported that the initial cost estimate of the shutdown has doubled, as its impact becomes more far-reaching than the withholding of federal workers’ paychecks.

 

Commercial real estate is one of the first spaces to take a hit — the federal government spends billions a year in rent payments and in loans to small businesses. So how exactly will the shutdown impact the CRE industry?

 

As expected, the federal government has a remarkable influence on office markets, especially in the D.C. Metro area. A notable example of this influence is BRAC, a 2005 nationwide Department of Defense initiative to lower spend way of consolidating its infrastructure. BRAC led to almost 4 million square feet in unfilled office space in the D.C.-adjacent Arlington, VA, a county that had historically boasted low office vacancy rates. It’s arguable that the effects of a government-wide shutdown, then, would be vastly more economically devastating.

Impact on Landlords

The federal government provides office space for more than 1 million workers annually via the Government Services Administration. While roughly half of this space is government inventory, the rest is privately owned. This means that, should the shutdown continue long-term, it’s unlikely that office rents will get paid on time. There isn’t necessarily cause for alarm yet: after the 2013 government shutdown, the GSA updated their policy to allow rent payments to be issued from the Federal Buildings Fund. However, it’s unclear how long these funds will last in the event of a prolonged shutdown. The D.C. office market will ostensibly be the most affected, given that GSA leases more than 51 million square feet in the DC metro area.

 

Joseph Brennan, a managing director at Jones Lang LaSalle, reinforced the notion that landlords won’t immediately be hurt by this turn of events. Brennan told Bisnow, “They’re going to pay the rent, and you should fulfill your lease obligations… The broader question I don’t think anyone has the answer to is what happens if it goes 60 or 90 days and gets into two or three rent payments.”

Impact on Tenants

A significant number of small businesses and non-profit organizations rely heavily on funding provided by the Small Business Administration — in 2017, more than $30 billion was provided to help these businesses flourish. As a result of the shutdown, about $200 million in SBA loans is being held back daily. This will force small businesses leaning on government funds to make difficult financial decisions; it’s unlikely that this will impact rent payments to start, but may lead to cutbacks in other areas.

 

Right now, there are a lot of unknowns regarding how the shutdown on Capitol Hill will continue to play out, but one thing is clear — the longer it lasts, the bigger the financial blow will be to tenants and landlords reliant on federal funding.

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