Welcome To The Longest Government Shutdown In History. CRE Is On Edge

The federal shutdown entered uncharted territory, breaking the record as the longest in American history and threatening to deepen what has already become a slow bleed through the economy — and the real estate markets that move with it.

The shutdown “underscores the dysfunction that global investors are increasingly factoring into U.S. risk premiums,” said Greg Friedman, who heads Peachtree Group, which oversees about $14B in real estate assets across the U.S.

“The U.S. has long been viewed as the most stable, predictable market in the world. It’s the benchmark for both safety and liquidity. When Washington grinds to a halt, it erodes that perception of reliability.”

The impasse that began Oct. 1 as a budget standoff has hardened into a full-scale policy paralysis. Hundreds of thousands of federal workers remain without pay, key agencies are dark, and programs from housing aid to food assistance are running out of funds.

Economists at EY-Parthenon estimate the shutdown is shaving about $7B a week from U.S. output. The Congressional Budget Office projects a 1% to 2% drag on fourth-quarter GDP, with losses reaching $14B if the shutdown stretches through mid-November. 

Many economic analysts believe the damage could deepen if back pay or benefits are delayed. The last comparable shutdown — a 35-day standoff in 2018-2019 — cost the economy $11B, about $3B of which was never recovered, the CBO said.

The fallout is rippling through commercial real estate. 

The Commercial Real Estate Finance Council cites a growing “confidence and timing headwind” as federally linked deals stall. 

Office leasing in government-heavy markets like Washington, D.C., is slowing, with JBG Smith saying it sees “real risks” to the region’s stability. Hotel revenue per available room in the capital region is down roughly 20% year-over-year, as the already softening demand for government-adjacent business travel collides with tourists pausing vacations. 

The Department of Housing and Urban Development’s workforce has been reduced to a fraction of normal capacity, delaying Federal Housing Administration commitments and inspections. Section 8 voucher funds could run out within days, and the National Flood Insurance Program remains suspended, affecting homeowners’ ability to obtain or renew flood insurance in high-risk areas, according to the National Association of Realtors.

Multifamily developers have told Bisnow in recent weeks that approvals have ground to a halt, lenders are freezing new originations, and deal activity is slowing as the industry waits for Washington to move.

Wall Street and real estate lenders are reacting in kind.

Treasury yields have swung sharply amid a data blackout that has kept the Bureau of Labor Statistics from releasing jobs or inflation reports. The Federal Reserve’s late-October rate cut to a 3.75%-4% range landed without context, prompting investors to demand wider spreads for risk and forcing borrowers back to the sidelines. 

The gridlock comes just as property investment conditions were showing signs of recovery. Two weeks ago, MSCI Real Assets reported transaction volume had risen 19% year-over-year.

It’s a precarious moment for America’s multitrillion-dollar commercial real estate industry — and yet, some see the volatility itself as the opening.

“These moments create some of the most compelling opportunities,” Friedman said. 

“Periods of policy paralysis often separate reactive capital from disciplined capital. Those who stay constructive and liquid through dislocation can find exceptional entry points once confidence returns.”

When HUD Goes Dark, So Does Development

The impact of the government shutdown on the housing industry has, so far, been a waiting game. 

Rental assistance programs that received funding for November are still being paid out, and affordable housing projects approved before the shutdown are proceeding as planned. 

“While Democrats continue to keep our government shutdown, HUD will use available resources to help the more than 4 million families it serves,” an agency spokesperson told Bisnow.

But cracks are expected to appear by midmonth.

The California Apartment Association told members in early October that HUD had already set aside funding allowing public housing authorities to continue operating tenant-based voucher programs through October and “likely into mid-November.” 

That includes the government’s rent contributions for Section 8 recipients, but beyond that, little certainty remains.

“If the shutdown goes beyond November into December, this is going to be a major issue for anybody holding a Section 8 voucher,” said Mahdi Manji, director of public policy at the Inner City Law Center. “It’s going to cause a major, major situation for any landlords that have accepted a Section 8 voucher.”

Roughly 2.3 million households nationwide use tenant-based Section 8 vouchers, according to the Center on Budget and Policy Priorities. The impact of any funding lapse would reverberate through the rental market and the broader economy, Manji said.

The shutdown is also slowing housing development, with HUD’s already reduced staff now pared down to a skeleton crew. Inspections, loan processing and other project work have been delayed. 

While many of the worst effects are still looming, one major consequence is already here, said Brad West, policy director for the Supportive Housing Alliance.

“We have to work with a lot of different banks and investors to sell off our tax credits or get the capital stack to build our buildings,” West said. “What those institutions love is certainty, and it has been a very turbulent year and has contributed to this feeling — this environment of uncertainty — which makes it harder to do deals, harder to build our buildings.”

The shutdown, he said, is “just another log in the fire.”

Travel Turbulence Hits Hospitality

Air traffic controllers and Transportation Security Administration screeners have gone without pay since Oct. 1, leading to staffing shortages, hundreds of delayed flights nationwide and security lines topping three hours at some airports.

In an automatic email citing staffing shortages, the Federal Aviation Administration said it is slowing traffic into certain airports “to ensure safe operations.”

The fallout has been immediate. Domestic travel spending has plunged by nearly $5B since the shutdown began, according to the U.S. Travel Association.

The hospitality sector, one of commercial real estate’s most cyclical and sentiment-driven asset classes, is bearing the brunt. A Q3 capital markets snapshot found hospitality was the only major property type with year-over-year pricing declines, as demand softened and uncertainty grew.

“This has not been an easy year for the hotel industry overall, with performance down a few percentage points from last year,” Driftwood Capital Chairman and CEO Carlos Rodriguez Sr. said in a statement to Bisnow. “The government shutdown has added another layer of pressure, particularly for hotels that capture government-related demand.”

Vendors and agencies are pausing reservations and deferring group bookings until there is more certainty, Rodriguez said. Nearly 500 casinos, hotels and convention bureaus signed a U.S. Travel Association letter urging Congress to end the shutdown. 

Major hotel brands are already baking the risk into their guidance. On Hilton’s Q3 earnings call, Chief Financial Officer Kevin Jacobs said the company had factored shutdown-related losses into its fourth-quarter forecast.

“The uncertainty certainly isn’t helping the recovery momentum we began to see earlier in the year, and we hope both parties can reach a resolution soon to get the economy moving again,” Rodriguez said.

GSA's Leasing Machine Pumps The Brakes

The shutdown’s impact on the federal government’s real estate activity and obligations is being closely monitored by the private CRE industry. 

The General Services Administration leases around 173M SF of office space nationwide, about 25% of which is in the D.C. area.

Disposition activity has halted, stalling the government’s efforts to streamline its owned portfolio, and awards for new leases and renewals have slowed, FD Stonewater principal Norman Dong told Bisnow.

“When you make a lease award, what you're doing is you are certifying that funds are available for this new lease requirement,” said Dong, who served as the GSA’s Public Buildings Service commissioner in the Obama administration and is now an adviser on federal real estate transactions. 

“If you're in a period where the government is not funded, that's something that you're not able to do.”

If the shutdown persists, the lack of new leasing activity could have implications for federal tenants in leased space, who may be pushed into holdover leases, and it could interfere with the missions of agencies that are counting on moving to new facilities.

Meanwhile, with recent furloughs at the agency, preleasing work — such as preparing market data and issuing requests for proposals — is expected to slow in the coming weeks.

“With fewer people working, you expect to see less leasing activity,” Dong said.

Dong said he expects the GSA to make its already promised rental payments for October — the federal government pays its rent in arrears.

During the historic 35-day shutdown during Trump’s first term, the GSA had enough holdover funds in its main rental account to cover leasing. The agency can rely on the surplus it carries over every fiscal year in its rental of space fund, and if that runs over, it can seek congressional approval to shift unspent funds set aside for development and renovations.

“Your first priority is to make payments against obligations that the government has already incurred,” Dong said.