The federal government shutdown now underway could disrupt plans for the federal real estate portfolio and put office landlords at risk of rent payment delays if a resolution isn't reached in coming weeks.
Shutdowns can eventually slow federal contracting, leasing and the disposition of government properties, analysts said, though building owners with federal tenants are expected to keep receiving rent for now. At least two real estate investment trusts warned this year that an elongated shutdown could adversely affect their performance.
In the absence of appropriations, the General Services Administration, the government’s real estate manager, said its buildings would remain open to occupants and that the agency would retain “adequate staffing” to protect federal property under its custody and control. Still, the GSA on Wednesday called for an end to the shutdown.
“Democrats should join Republicans to reopen the government quickly and put the American people first,” a GSA spokesperson told CoStar News via email.
The government shutdown began early Wednesday after Congress failed to pass annual appropriations funding to keep government operations running for the fiscal year, partly due to a debate over healthcare spending.
Lawmakers on both sides of the political aisle blamed the other party for the situation. If Republicans and Democrats are unable to strike a compromise, it could also force construction timelines to be pushed back, real estate professionals and analysts told CoStar News. The last shutdown, spanning 35 days between December 2018 and January 2019, was the longest on record.
Meanwhile, President Donald Trump on Tuesday threatened that "a lot" of federal workers would be laid off if the government shut down.
“The layoffs to me are a more significant long-term threat than a shutdown,” David Tarter, the executive director for George Mason University’s center for real estate entrepreneurship, told CoStar News in a phone interview. He said that the warning, if realized, could affect commercial real estate markets such as Washington, D.C., by creating vacant buildings and even lead to fewer people frequenting business in downtowns around the country.
Property activity to slow
With the shutdown in force, the GSA would largely be prohibited under federal rules from expending funds that have not been appropriated, said Gordon Griffin, an attorney with Holland & Knight who focuses on federal real estate. Near-term needs funded by previously approved appropriations are unlikely to be severely affected.
“It's extremely likely that all September rents will be paid today on time,” Griffin said in an interview. “We have never actually encountered a shutdown that has lasted long enough to directly have mass impacts, or widespread impacts, on the payment of rent on GSA leasing."
Griffin also said there is a good chance a short shutdown would have no effect on October rents that are paid in November. But after about six weeks, if the GSA reaches the end of the carry-over funding, that could disrupt rent payments.
"This is really just one more data point that I think makes it look a little bit riskier and a little more dangerous to the private sector, to the development community and to the lending community,” Griffin said.
Meanwhile, construction contracts already awarded on a fixed-price basis are expected to be mostly unaffected by the shutdown.
However, for other contracts, including those that have yet to be awarded, the shutdown probably could lead to a suspension of operations. That’s according to a fact sheet issued by trade group Associated General Contractors of America. Even when a contract does not require new funding, performance could still be affected, for instance, if contracting officers and administrators get furloughed, the group said.
REITs warn of disruption
If the shutdown drags on, that could create uncertainty in the broader commercial real estate market, especially among real estate investment trusts that cater to federal agencies, according to some of these major public office landlords. They have warned about such a scenario in filings with the Securities and Exchange Commission.
“Our 10k [filing] is meant to flag potential risks for shareholders, Easterly Government Properties CEO Darrell Crate told CoStar News via email. "However none of the past shutdowns have ever affected lease payments. We don’t anticipate this shutdown to be different from any other."
Easterly said in an SEC filing this year that "substantially all of our revenue is dependent on the receipt of rent payments from the GSA and U.S. Government tenant agencies."
Fellow REIT JBG Smith said this summer in an investor report that rent collected from the GSA for federal agency space accounts for roughly a quarter of its annual income from leases. JBG Smith also said the federal government is its largest tenant.
"Our assets and the property development market in the Washington, D.C., metropolitan area are dependent on an economy that is heavily reliant on federal government spending and use of office assets," JBG Smith said in a filing with the SEC, "and any actual or anticipated curtailment of such spending could have a material adverse effect on us."
The REIT declined via email to comment on Wednesday.
Others see the lapse in government funding as more of a minor annoyance than having greater material effect on real estate investment.
Alex Pettee of advisement group Hoya Capital Real Estate said if the shutdown lasts about two weeks he’d expect similar effects in real estate investment as the December 2018 to January 2019 government shutdown. The main factor is the fallout it could have on the SEC's review and approval of certain statements.
But real estate investment trusts “maintain active shelf registrations, so the routine capital raising activity is largely unaffected,” he said.
The SEC’s website on Wednesday stated that “until further notice, the agency will have a very limited number of staff members available.”
During the 2018-2019 shutdown, billions of dollars of new commercial real estate spending got sidelined, and the State Department's EB-5 Immigrant Investor Program expired. That program set aside EB-5 visas for participants who invest in commercial enterprises in the United States that create jobs and meet certain other conditions. It later was reauthorized through September 2027.
This time, a shutdown could translate into a $7 billion weekly hit to the economy, according to accounting giant EY, formerly known as Ernst & Young.
Mark Heschmeyer contributed reporting to this story.
Updated Oct. 3 with comments from the CEO of Easterly Government Properties.