Impacts on commercial real estate

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When the government stops, real estate observers tend to focus first on the impact on the residential market. Potentially thousands of house sales will be retained because the federal flood insurance program is no longer able to issue new policies; The Federal Housing Administration, the Ministry of Affairs of Veterans and the Ministry of Agriculture could slow down or suspend their mortgage treatment; And the IRS may not process tax transcriptions or income verification documents as quickly.

But the impact on commercial real estate, although not as immediate, is much more in -depth. A government closure delays government data on the economy. It provokes uncertainty in the financial markets and, consequently, the realization of commercial real estate, in particular for small businesses. It also strikes the confidence of investors. Finally, but above all, this causes a decline in consumer demand for certain sectors.

According to an article by the Commercial Real Estate Alliance (CREA), potential ramifications include:

• The reduction in the request for CRE as a member of businesses and government agencies delay or cancel rental and development projects.
• A greater difficulty for investors and CRE promoters to obtain financing transactions and carry out in a context of market uncertainty and volatility.
• Delayed approval of permits or other government signaling panels necessary for CRE development projects.

The government’s closure has noted that there was no publication of the September Labor Statistics monthly employment report. This affects investors who need this type of data to make decisions about the state of the economy and interest rates.

If the closure continues, the census office will not publish economic data on construction expenses, housing departures and construction permits. These are all essential for multifamilial investors.

The uncertainty of the market leads to a stricter credit of lenders and potentially higher risk premiums for transactions, especially if they have something to do with federal programs.

“Investors in general and lenders are specifically looking for stability, and when there is political instability, this is always more caution for investment and loans,” said Ran Eliasaf, founder and managing partner of Northwind Group, a key in real estate capital and funds. “We believe that the greatest risk of subscription is political risk. This is true for the federal level, such as the government closure, and it is true for local, like the elections of the mayor of New York.”

By watching specific sectors, retail and hospitality will see the fastest impact because they are fully focused on consumers. Consumer spending, especially in areas where there is a high concentration of federal workers, could drop because employees are on leave or even dismissed.

“I think it is a great risk,” said Christine Cooper, chief economist in the United States and director general at Costar, a commercial information and analysis company. “Think of all small retailers and cafes. They have very thin margins, so they are more likely to be disturbed if they lose their customers. They will not be able to afford it, and you will see closures in short term.”

This is a similar situation in hospitality, where closings in government services and national parks will have an impact on tourism. Washington, DC tourism has already been affected by activation by the administration of the National Guard and other federal troops. It is only one more strike against the city.

Qualified nursing establishments and care properties for the elderly may also see delays in transaction. Those, as well as affordable housing projects, use the financing of the US Department of Housing and Urban Development (HUD).

“I think [for] HUD funding, the queue will lie down. Requests will not be processed, “said Eliasaf.

The federal commercial real estate market will take the hardest, because sales of these properties, which are managed by the General Services Administration (GSA), will either be delayed or arrested. Federal contracts, including new leases and property maintenance agreements with tenants, will also have to wait.

“It will have an impact on the transaction. Certainly anyone negotiating a GSA lease, a lease supported by the government, from AV to the guarantee of HUD funding will encounter problems at the moment,” said Eliasaf.

Depending on the duration of the closure, the FPIs which are aimed at federal agencies, such as the properties of the Government of East and JBG Smith which depend strongly on the payments of rent of the government, could be in hot water.

In a deposit of the SEC earlier this year, Easterly said: “Almost all of our income depends on the reception of rent payments for tenant and American government agencies.”

If the stops are a guide, the construction sector will also be affected. A ConstructConnect report, an information and technology company for the construction industry, notes that the government’s closure in 2013 has struck infrastructure projects funded by the federal government, as permit examinations of the environmental protection agency have ceased. Entrepreneurs and trade specialists rely on these permits to mobilize teams.

And, the closure of 2019 “frozen billions of dollars in federal construction expenditure, blocked the approvals for projects related to the Ministry of Transport and disrupted tenders, which have tightened subcontractors such as electricians, plumbers and concrete specialists, who depend on the predictable project are starting to manage the workforce,” materials and treasury flows, “according to The report.