3 min read
Key takeaways
- A federal government shutdown is possible, but when it will occur and how long it will last is unclear. Generally, the longer the shutdown, the greater the economic impact.
- Regardless of a shutdown’s length, it could reduce economic growth, and views of weaker U.S. governance could lead to higher interest rates.
- Multifamily—especially affordable—housing would likely feel the greatest impact from a shutdown in the form of delays in government housing programs and rental payments.
On the heels of a debt ceiling debate, Congress recently averted a government shutdown by passing a last-minute stopgap spending bill. But that’s only a short-term solution; a 2023 government shutdown is still a real possibility when the current continuing resolution expires.
What happens if the government shuts down
A government shutdown occurs when Congress fails to pass the 12 spending bills necessary to fund the federal government. Without enacted funding bills, federal departments and agencies halt all nonessential work and may shut down entire organizations. The government won’t process payroll as long as the shutdown lasts.
“Importantly, many government institutions and personnel are excepted, meaning they will continue to work despite the shutdown,” said Ginger Chambless, Head of Research for Commercial Banking at JPMorgan Chase.
The likelihood of a government shutdown
“A government shutdown is far from unprecedented,” Tom LaSalvia, Head of Commercial Real Estate Economics at Moody’s Analytics. Given the current political climate, “Another shutdown seems to be more ‘when’ and ‘how long,’ rather than ‘if.’”
But that doesn’t mean there will be a 2023 government shutdown. “Conflicts abroad could give lawmakers a greater sense of urgency to come together more quickly,” Chambless said.
LaSalvia agreed. “Combined with a looming economic slowdown, neither party wants to take the blame for adding another major economic and political shock into the fray—especially with an election year looming.”
Alternatively, Congress could pass another stopgap bill to temporarily fund the government.
Why the length of a government shutdown matters
A shutdown could last for days or weeks—the second 2018 shutdown extended into 2019, lasting 34 days. “The impact to economic growth and market sentiment tends to grow the longer the shutdown lasts,” Chambless said.
For example, 2018’s first shutdown lasted two days and had a minimal economic effect, while the 2018-2019 government shutdown had significant impacts, including:
- Delaying roughly $18 billion in federal discretionary spending for compensation and purchases of goods and services and suspended some federal services
- Reducing Q4 2018’s real gross GDP by approximately $3 billion
- Losing more than 25,000 years of productivity from furloughed workers
How a shutdown could impact commercial real estate
A government shutdown’s impact on real estate could be minimal. However, the interest rate environment places commercial real estate in a different position from previous shutdowns.
“A shutdown—a show of further government dysfunction—could harm the U.S. government’s credibility and put pressure on government debt,” LaSalvia said. “Any additional shock to interest rates amplifies the already difficult refinance situations for many commercial real estate loans.”
“It’s difficult to predict how interest rates respond to a government shutdown,” Chambless said. “On one hand, views of weaker U.S. governance could drive interest rates higher, while volatile market conditions and increased recession concerns could prompt a flight to quality, pushing treasury yields lower.”
Within the industry, the government plays a greater role in multifamily housing than other sectors. “Low Income Housing Tax Credit, Section 8 and Federal Housing Administration programs are all at risk, but mostly in the form of delays rather than long-lasting impacts,” LaSalvia said.
Government assistance may also be delayed, affecting rental payments. Affordable housing could be hit hardest, but postponed payments could also cause problems for workforce and market-rate rental owners, depending on their mix of residents.
How multifamily property owners can prepare for a shutdown
Time is limited. But there are still things multifamily investors can do to prepare, including:
- Building reserves: Multifamily operators—especially affordable housing providers that rely on government assistance programs for rent payments—should make sure they have enough in reserves to cover at least six months of debts and operating expenses.
- Streamlining operations: It’s important for multifamily investors and affordable housing providers to make their processes more efficient and optimize cash prior to and during a longer shutdown. Tactics can range from creating economies of scale to investing in rent payment technology.
A government shutdown would only heighten market uncertainty. Find out why multifamily marketing is so important in and up-and-down economy.
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