Government Shutdown Threatens To Add More Stress To D.C.-Area Economy, CRE Demand

The first government shutdown in seven years began Wednesday morning, leading to further furloughs and potential job cuts during a year that has been defined by a dramatic slashing of federal spending. 

After Congress failed to pass a budget to fund government operations by Tuesday night, all nonessential services and personnel are being shut down. 

As with every time the government shuts down, the impact is expected to be felt by federal employees and programs nationwide and have ripple effects on the economy and demand for commercial real estate, especially in sectors like hospitality and retail. The extent of those effects largely depends on how long the shutdown lasts. 

But this time could also be different, as President Donald Trump has discussed using the shutdown as an opportunity to make “irreversible” cuts to spending programs, deepening the cuts to the federal workforce that he launched in January with the Department of Government Efficiency.

Around 750,000 federal employees will be furloughed without pay during the shutdown, the Congressional Budget Office estimates, and those workers would likely cut back on spending, leading to nationwide economic consequences. Oxford Economics estimated Wednesday that a shutdown will reduce GDP growth by up to 0.2 percentage points per week. 

The damage will be felt most where the federal government is concentrated: in the D.C. region. 

The cuts could have dramatic impacts on consumer spending in the region, hurting everything from restaurants and bars to hotels and the Metro system, all during a year when the city has already taken several blows.

“There is already tremendous pressure on the region because of this weakened spending power, increased uncertainty around the labor market,” D.C. Policy Center Executive Director Yesim Sayin told Bisnow. “This can further add to it. At a time where we need vibrancy, you just get another negative shock.” 

The Trump administration’s workforce cuts have already had an outsized impact on the nation’s capital. The District alone has lost an estimated 8,700 federal jobs this year, and Virginia and Maryland have lost thousands more. Roughly 25% of the region’s workforce is federal employees, and many private sectors like contracting and consulting depend on government spending. 

Now, the Trump administration’s indications that it may use the shutdown to fuel more permanent workforce reductions is putting federal employees and the D.C. economy in an even more precarious state. 

In a letter Tuesday releasing his monthly revenue estimate, D.C. Chief Financial Officer Glen Lee wrote that the city’s economy is “under significant strain due to large reductions in the federal workforce and a sharp decline in contracting activity initiated by the new administration.” 

“Another risk is the prospect of a prolonged federal government shutdown, which could place significant strain on the economy,” Lee said. “Previous federal government shutdowns disrupted the District's economy and had a range of impacts on revenue.”

The 35-day partial government shutdown in 2019 cost the D.C. region more than $1.5B in lost economic activity, George Mason University researchers estimated at the time. And D.C. officials said it cost the city $47M in lost tax revenue. 

“What is different about this time is the federal workforce already feels under tremendous pressure,” Sayin said. “They have not been treated particularly well by this administration. There is word out there that the administration can use the furlough as an opportunity to further weaken the federal workforce, and that means people are going to be extremely cautious.

“Spending will go down, affecting the businesses, so secondary and tertiary effects running through the entire region,” she added.

The hotel industry could take an especially hard hit. 

If the shutdown lasts past this weekend, the Smithsonian Institution said it can keep the National Zoo and its free museums in the city open until Monday with prior funds, but if the shutdown lasts beyond that, they will need to shut down, potentially leading tourists to cancel or delay trips to the city. Business travel to D.C. is also expected to slow down, as federal contractors and other visitors may not be able to hold meetings with the federal employees they typically work with. 

“This isn't a great time of year for a shutdown,” Brookings Institution fellow Tracy Hadden Loh said. “Spring and fall are kind of like the two twin peaks of the travel and tourism industry in the D.C. area. And so the timing here is directly hitting the fall peak.”

The Office of the Chief Financial Officer’s revenue estimate Tuesday says tourism “remains a vital component” of the city’s economy, accounting for 10% of the workforce. D.C. hosted 27.2 million visitors in 2024, generating $2.3B in tax revenue for the city. 

Restaurants and retail businesses are also poised to be impacted as federal workers pull back on spending, D.C. retail broker Bill Miller said.

“Well, it's just going to slow things down. They're going to be people that are more concerned about their spending and, you know, whether or not they're getting paid and all that kind of thing,” said Miller, principal of Miller Walker Retail Real Estate. 

“We've got a bunch of challenges we have to overcome, and we don’t need another one,” he added. 

MRP Realty Managing Principal Bob Murphy, one of the most active developers in D.C., said it isn't the first time the city has gone through a shutdown, but it comes at a bad time for the market. 

“Given everything else we’re facing, it just adds to our local issues,” he said in a written statement. “I think it’s all temporal but there will definitely be an impact until things are resolved.”

Even as the city waits to see how things will play out on Capitol Hill, on a sunny day in the heart of the nation’s capital, things were proceeding as usual, Golden Triangle Business Improvement District President and CEO Leona Agouridis said. 

“Our streets are looking very busy right now,” she said.

But she added the BID, which represents businesses and property owners in a large swath of downtown D.C., is “watching it just like everybody else is.”

“We've been through Covid, we've been through lots of things that I think grow resilience, and one of the things that you learn is the importance of staying focused and continuing what you have laid out organizationally,” she said.

Jon Banister contributed to this story.