Tuesday, January 22, 2019

A Look Into The Government Shutdown's Effects On The Commercial Real Estate Industry

government shutdown effects on commercial real estate

As 2019 begins, events from 2018 are seemingly dragging themselves into the New Year. Namely, the continued government shutdown. The ongoing gridlock in Washington has brought many government agencies to a standstill, with “non-excepted” government employees being placed on furlough, prohibited by law from using their government emails or other federal resources.

The ripple effects are widespread, affecting national parks, federal research agencies and even the panda cam at the Smithsonian National Zoo. But you didn’t come here for the pandas. You came here to find out what effects the government shutdown is having on the commercial real estate industry. So, let’s take a look.

To start, small businesses will have a harder time attaining non-conventional loans, as the Small Business Administration (SBA) announced in a Facebook post on December 22 that, due to a lack of government funding, it will remain inactive until further notice.

For the commercial real estate sector the repercussions of this will be felt in potentially stalled deals and projects. Businesses that had been planning to apply, or already applied for, a 504 loan through the SBA, to use towards the construction, renovation or purchase of a building or land, have had to place their plans on hold until the loans can be processed.

But, it’s not just the end of the government shutdown businesses have to wait for. Once the government opens back up, and government agencies open their doors, there will be a massive influx of loan applications from certified development companies (CDC) across the country trying to get their loans approved by the SBA.

“There’s going to be an enormous backlog. So the SBA is going to have to buy some time to get through all of these loans that are going to be submitted to them simultaneously,” said Laura Brown, Vice President of BDC Capital and CDC New England. In years past BDC Capital and other CDCs have seen the SBA come out of shutdowns with a more scrutinizing eye. Screening out deals they would normally approve. “There’s going to be some delay, it’s going to take a little bit longer to catch up for everybody, the CDCs and [the SBA].”

This waiting game can complicate things for the borrowing business. The longer the wait for the loan is, the higher the chance for any potential purchases of buildings or land to fall apart. Especially if the seller gets cold feet, or is highly motivated to sell.

Some local CDCs are trying to bridge the gap left by the SBA’s closure by providing direct financing options that can be approved completely within the CDC. Allowing some stalled deals to get moving again, without having to wait for the government to open back up and the SBA to wade through the flood of loan applications that continue to build up each passing day.

The multifamily sector which, after a great 2018, enters 2019 with some uncertainty, will not be helped by the shutdown. Both the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA), while not completely closed, have seen a significant portion of their staff furloughed. The effects of this being that HUD will take more time to process loans for housing projects and enforcing federal housing regulations, while the FHA has made no commitments that it will endorse new loans for its multifamily program.

Locally, most multifamily financing takes place conventionally. However, HUD does provide loans for many larger projects that may not otherwise work without that financing. In the same fashion, the FHA provides a good amount of financing to smaller owner occupied buildings of four units or under.

While buyers haven’t been left completely in the cold, as both agencies are still operating, the staffers are spread so thin that any movement will be slow. Meaning anyone who relies on these loans for new mortgages or refinancing are going to have to live with delays.

Commercial owners could be impacted in a number of different ways. Due to the SBA’s closure, any tenants that rely on SBA loans to help them pay rent could have a hard time getting by, especially if the shutdown drags out for an extended period of time. While there is relatively little chance that any of these tenants would default on their rent, they could be forced to explore cost-cutting measures to ensure they are able to pay it on time. And any entrepreneurs who were looking to fund a start-up with an SBA loan will have to put those plans on hold, or find other means of funding. Potentially making it more difficult to afford space, and harder for landlords to fill space.

It’s not just those that rely on SBA loans that could see an impact. Retail and hospitality businesses whose clientele is made up of a majority of government workers have seen foot traffic dip in recent weeks as offices have been closed and workers, not sure when their next check will come, have curbed their spending. The effects of this being felt most heavily in economies where government workers make up a large portion of the local workforce.

And what about landlords who lease office space to the government through the General Services Administration (GSA)? At the moment, they don’t have too much to worry about, as there is no risk of rent payments not being made. The question, though, is will payments be made on time?

As the GSA receives funding that can be carried over from one year to the next, it has been able to keep its doors open and staffers working, while making sure lease payments are being made on their due dates. But, as the balance of carryover funding has declined in past weeks, the GSA has begun to furlough their employees, as of Monday, January 7. The question then becomes, if the shutdown continues on, how long can the GSA go before it is unable to make rent payments on time?

The effects of the government shutdown are far reaching within the commercial real estate sector. Too far to properly cover in one blog post. While, so far, it has mainly brought only discomfort, the big question is what happens if it extends to 30 days and beyond? And at what point do doomsday scenarios need to be taken seriously? It’s enough to make you want to grab a beer. Just hope that your beer of choice was approved by the Alcohol and Tobacco Tax and Trade Bureau before the government shutdown.

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