As the federal government shutdown reaches the one-month mark, commercial real estate professionals are assessing the closure’s current and potential impacts on the CRE sector.
Maryland is positioned to incur some of the biggest impacts in the country. The federal government is the single largest employer in the state with approximately 254,000 Maryland residents on its payroll. In addition, the state is a hub of federal contractors, especially in defense, intelligence and life sciences.
The shutdown has forced some contractors to furlough employees and reduce work hours for others. Meanwhile, some retailers and hospitality businesses are dealing with a drop in sales.
While those challenges aren’t expected to trigger immediate CRE problems, they could generate longer term strains on the market.
“I do think there is a short-term impact that can lead, actually, to longer term impacts,” said Harry Dematatis, Senior Vice President of NAI KLNB Commercial Real Estate Services. “I was speaking to one of my government contracting clients last week. They wanted more office space but they are waiting to hear about a contract. Everything has basically come to a halt with awarding and servicing contracts because those federal employees have been furloughed.”
Every day the shutdown continues will increase contractors’ lost revenues and prolong the time it will take them to get back to their previous financial state.
That financial strain, Dematatis said, has been layered on top of uncertainties and changes in federal contracting this year.
“There has been contraction by the administration of a lot of contracts and there’s a feeling that there’s a state of flux around many contracts right now. Will they still be active? Will they be modified?” he said.
All of that uncertainty is convincing some contractors to pause leasing decisions, he added.
Interruption of some government functions could have other impacts on CRE activities.
“We have some reliance on output from the federal government, whether that is Census data, Bureau of Labor Statistics data, or other economic data to include in market reports, grant requests or assessments of deals,” said Owen Rouse, Senior Vice President, MacKenzie Commercial Real Estate Services.
Lack of key information could complicate dealmaking or impact investor confidence, he said. And those complications arrive during a period when the market is already wrestling with mixed economic indicators.
“When it comes to the general economy, I’m most comfortable either in the sunshine or the rain,” Rouse said. “If it’s a bad economy and we’re all just living through it, fine. If it’s a good economy and everybody knows that, great. But I feel like if you ask 10 people about the economy right now, five will say it’s terrible and five will tell you there are no problems. To me, that is a problem. Why do we not have a clear view?”