Research

A primer on the federal government shutdown

January 23, 2019

The longest on record

With each passing day, the federal government shutdown sets a record for duration. Historically, shutdowns typically impart little permanent impact on the economy. Thus far, that remains true. But with each passing day the damage and risks to the economy increase.

We estimate the shutdown is reducing annualized economic growth by roughly 25-30 basis points per month.

But the impact is nonlinear – as time elapses the impact on the economy will increase as more departments lose funding and contractors continue to go without work and pay. While government workers get remunerated for their unpaid wages, contractors do not. Some of the money that government employees and contractors aren’t currently receiving will go permanently unspent. Ultimately, if the shutdown creates a more widespread impact on consumer confidence and corporate and investor sentiment, then the real economy could suffer. We are seeing some early signs of this – consumer sentiment declined more in January than expected which is at least partially attributable to the shutdown.

Just as problematic, the government is not releasing important economic data and it will likely take months to resume a normal publishing schedule.

Essentially, we are flying blind in analyzing the economy.

For example, the first look at fourth quarter and 2018 GDP was scheduled for release on January 30. That now looks impossible, even if the shutdown were to end soon because the Census Bureau is not collecting the survey data needed for those calculations during the shutdown. The government has already failed to release other important data.

Other less obvious risks are lurking as well. With many officials not working, including Food and Drug Administration (FDA) inspectors, the probability of the public consuming contaminated food has increased. And with the labor market remaining so strong, the risk of government workers leaving their jobs permanently due to the shutdown looks meaningful. And within the next few months, the government will need to reach an agreement on raising the debt ceiling. Failure to do so would be catastrophic for the economy.

Impact on CRE

In the short-term, the commercial real estate (CRE) property types at risk are those that have the shortest lease lengths and deal directly with households and consumers. All residential property types (e.g. single family, apartments, affordable housing) and hotels should suffer first. Homeowners could technically default on their mortgages, which would reverberate through the wider economy. Households in rental units (particularly affordable housing where many residents rely on government programs) could struggle to pay their rent on time which could consequently impact the landlord’s ability to service any mortgage debt. Hotels could face pressure from permanently cancelled stays, though that appears more temporary. Property types exposed to the corporate sector, such as office, industrial, and retail, should better weather the storm in the short run due to the indirect impact the shutdown would have on most corporations and the longer-term durations of the leases for these property types. One important caveat – any buildings where government contractors represent a large percentage of the tenancy could suffer if these tenants struggle to pay rent. In the long run, all property sectors should feel the pain of a prolonged shutdown.

Geographical impact

Geographical impact is broadly dispersed. While the nation’s capital and populous states boast many federal employees, in other smaller states federal employees represent a larger percentage of total employment.

Conclusion

We have entered uncharted waters. If the shutdown ends soon, we expect minor impact on both the economy and CRE market. But if a prolonged shutdown ensues, the impact could become severe, imperiling both the economic and expansion and the health of the CRE market.  

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