After The Shutdown, CRE Copes With 'Unprecedented Backlog,' Economic Pressure And Fear Of A Repeat

Days after the longest federal government shutdown in history came to an end, the commercial real estate industry is only beginning to understand the impacts of the 43-day closure and anxiously awaiting the possibility of another one in less than three months.

The shutdown was a blow to an already stumbling economy, with roughly $11B permanently lost from the country’s gross domestic product, according to Oct. 29 Congressional Budget Office projections. 

In CRE, multifamily and hotel operators are most directly impacted, with housing authorities bogged down by a pileup of unprocessed loan applications, payments delayed and travel tamped down by worker shortages at key agencies.

“I think most of the partners in the industry are understanding that there is a significant backlog that's been created by the 43-day shutdown, an unprecedented backlog,” Nixon Peabody affordable housing practice partner Rebecca Simon said. 

President Donald Trump’s signature on the continuing resolution reopened and funded the government through the end of the year and restored funding to programs, but for many, the damage is done.

Affordable housing operators were left scrambling when the shutdown reduced the Department of Housing and Urban Development to a skeleton crew in early October.

New loan processing ground to a halt, inspections were suspended while staff were furloughed, and project-based voucher approvals were stalled as HUD operated at roughly 25% of its typical staffing levels. 

The prolonged shutdown threatened the payment of Section 8 vouchers used by millions of Americans for rental assistance, and residents in affordable housing that also relied on the government for supplemental food assistance — also delayed by the shutdown — were increasingly forced to decide between groceries and rent. 

“Some of our properties have federally funded vouchers and others do not (i.e market rate) and we have seen a lot of tenants not pay full rent during the shutdown due to the prioritisation of food/meals with the loss of SNAP benefits,” Marjy Stagmeier, managing partner at Atlanta-based investment firm Mission Partners, said in an email. 

Broader economic concerns also worsened as the shutdown dragged on. In addition to decreased consumer confidence, a previously all-but-guaranteed interest rate cut in December is now a coin toss, with the CME FedWatch tool on Thursday showing just a 50% likelihood of a cut on Dec. 10. 

Economic softness has contributed to tough times for many hotel operators across the U.S. this year, particularly in the midrange and budget categories. But the shutdown added a new level of trouble for hotels, furloughing Transportation Security Administration and Federal Aviation Administration workers. Eventually, airline traffic was reduced by 10% at certain airports.

Nearly $6B was lost in travel-related economic activity, and more than 5 million travelers were impacted by delays and cancellations, according to the American Hotel & Lodging Association.

It may take awhile to recoup as the FAA slowly lifts the mandated flight restrictions at 40 airports, which will take about a week, The New York Times reported.

But the holiday ramp-up may not have as much momentum as expected. Nearly 20% of Americans have already indicated they canceled or changed their Thanksgiving travel plans, according to AHLA.

The shutdown left the hospitality sector, reliant on sentiment-driven assets, “limping into the end of the year,” Baird senior research analyst Michael Bellisario said.

An OysterLink analysis of AHLA data found that by Day 36 of the shutdown, the hotel industry had lost more than 6.7 million unbooked room nights — equating to about 186,000 rooms remaining vacant a day, according to a release.

The losses cost the hotel industry $1.2B by the time the shutdown was lifted, according to AHLA.

While reservations weren’t getting canceled left and right, future reservations slowed — and vendors and agencies were pausing on confirmations until there was more certainty, Driftwood Capital Chairman and CEO Carlos Rodriguez Sr. said.

Hospitality, which was the only major property type with year-over-year pricing declines, had already been hit with a confluence of macroeconomic headwinds this year, like tariffs, inflation, high interest rates and declining consumer confidence.

“The economy is, I’ll say, a major concern,” Rodriguez said. “Anything that detracts from the growth of the economy will affect us, but hopefully the shutdown is over, hopefully won't happen again, and then we can get back to business as usual.”

As the fallout from the shutdown works its way through the system, the specter of another looms. The continuing resolution funds the government through the end of January, and some are trying to minimize the potential impacts of another shutdown. 

“Another shutdown at the end of January would look very similar to what this shutdown looked like for the affordable housing industry,” Simon said. “You'd see concerns around monthly vouchering. You would see significant delays with approvals for transactions, and overall, just a lot of delay, a chilling effect across transactions for affordable housing in the industry.”

Her organization is trying to get as many applications processed through HUD as possible before the Jan. 30 cutoff.

HUD was generally able to continue meeting its funding obligations during the shutdown, the National Association of Housing and Redevelopment Officials said in a statement. But the temporary staffing cuts have likely created a backlog of requests for property inspections and financial reviews required to secure HUD funding, NAHRO said. 

But the issues aren’t limited to HUD projects. Federal Housing Administration insurance approvals weren’t on any kind of waitlist before the shutdown, but now the reduced staff returns to work facing a backlog, according to Simon. She has heard there are 75 to 100 projects in that queue, each representing potentially hundreds of affordable units.

Processing delays can interrupt the delicate, complex dance of affordable housing financing, in which different pieces rely on one another falling into place at the right time.

“Affordable housing development runs on tight timelines, and even short disruptions can delay closings, push projects out of compliance windows, or jeopardize financing,” Ashley Stockton-Massie, the director of affordable acquisitions and development at The Clear Blue Co., said in an email. 

Simon and her group are working with HUD to triage and prioritize transactions and applications that are specifically tied to financing with impending deadlines. 

“And then I think HUD will then address the usual applications that they've received over the last almost month and a half,” she said. “That's probably the biggest impact for our world, how quickly these deals are able to get closed.”

It isn’t clear how quickly HUD will be able to clear the backlog of requests that built up during the shutdown, when the few staff who were clocking in were still going without a paycheck. 

Several affordable housing operators lauded the rank and file at HUD for continuing to push through what they could despite the government not being open for business. 

“But the reality is that many transactions now face finite windows to close due to state bond allocation timelines and HUD approval requirements,” Noah Hale, the head of development at Fairstead Capital, said in an email. “That means we’re asking a lot from HUD staff, who are understandably managing an overwhelming backlog.” 

Even before the shutdown, affordable housing operators had found it increasingly difficult to balance their books amid rising costs while simultaneously facing steep cuts to programs they rely on for funding, a NAHRO spokesperson said.  

Compounding these challenges are new policy directives announced last week governing the $3.5B HUD Continuum of Care program, the primary source of federal funding to fight homelessness.

The sprawling reforms would shift HUD’s approach from housing-first to a treatment-first model that requires aid recipients to also accept mental health or addiction services.

Three-quarters of the program’s funding is set to be shifted away from services that offer permanent housing to programs capped at two years, and dollars would be redirected from housing programs to projects aimed at clearing homeless encampments. 

Many in the affordable housing industry awaited these rule changes during the shutdown, but HUD wasn’t able to release them, according to Kim Johnson, senior director of policy at the National Low Income Housing Coalition.

With the shutdown over, agencies and developers are now getting a glimpse of how the new rules will impact them, though the full scale of the changes remains to be seen. 

A new cap on spending for permanent supportive housing will hit nonprofits and landlords that operate such housing and have significant impact on developers’ ability to create deeply affordable housing, Johnson said. 

“​​If … that money dries up, then suddenly, the folks who either relied on that funding for rent payments or who weaved some of those funding streams together to create permanent supportive housing suddenly don't have the financing they need anymore to continue the operation of that housing,” she said.