Government Shutdown

 

WHEN THE U.S. GOVERNMENT SHUTS DOWN — CREDITABILITY TAKES THE FIRST HIT

When the U.S. Government shuts down, the first and most immediate impact is credibility. The global community begins to question whether the United States can honor its commitments — from paying its bills to maintaining economic stability.

The Immediate Effect: Residential Real Estate

Real estate professionals first look to the residential market for signs of disruption. During a shutdown, key federal agencies slow down or completely halt essential services:

• Federal Flood Insurance policies are held up.

• Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA)loans may face significant processing delays or suspensions.

• The IRS may stop processing tax transcripts or income verifications, which can stall or kill mortgage approvals.

These disruptions ripple through home sales, refinancing, and construction starts — creating uncertainty for lenders, buyers, and builders alike.

The Broader Impact: Commercial Real Estate

The far-reaching consequences are even more severe in Commercial Real Estate. The absence of federal data and market guidance injects uncertainty into every corner of the financial system:

• Reduced demand for commercial property as both government agencies and private businesses delay or cancel leasing and development projects.

• Financing becomes difficult as banks hesitate to fund new deals amid unclear economic forecasts.

• Permits and approvals are delayed, leaving construction and redevelopment projects in limbo.

When federal agencies close, vital economic data stops flowing. Without labor statistics, inflation reports, and housing-start figures, even the Federal Reserve lacks the information it needs to make sound policy decisions. Multifamily investors lose visibility into key indicators like building permits and housing completions — critical tools for analyzing market supply.

The Sectoral Fallout

The Retail, Hospitality, and Senior Housing sectors feel the pain first. Hospitality is especially vulnerable as consumer spending tightens. Areas with a high concentration of government workers face furloughs and layoffs, further depressing local economies.

Small businesses — particularly restaurants, retailers, and service providers — are hit the hardest. Operating on thin margins, many are forced to close or take on debt just to survive.

Meanwhile, Federal and Institutional Commercial Real Estate markets freeze. Properties sit unsold, leases remain unsigned, and Real Estate Investment Trusts (REITs) dependent on steady rent payments struggle to cover operating expenses. Dividends may be suspended, leaving income-dependent investors — retirees in particular — exposed.

Construction Comes to a Halt

Government-funded construction projects stop immediately. Developers depending on progress payments or public contracts face mounting fixed costs with no relief in sight. Completed developments and remodels face “Due on Completion” clauses that can’t be met because buyers disappear. Foreclosure notices rise as lenders — themselves under pressure — hesitate to assume property ownership costs.

Turning Lemons Into Lemonade

Amid the chaos, cash-rich investors find opportunity. With credit markets frozen and fear widespread, high cap rates and favorable terms return to the market — conditions unseen since the last major economic disruption.

Those with liquidity, discipline, and a long-term view will find that a government shutdown, while painful, can also reset pricing and create generational buying opportunities.

👉 Bottom line: This rate cut signals the start of a new easing cycle. For real estate, it may not be transformative on its own, but it restores momentum at a time when confidence has been under pressure. The real question now is how quickly the Fed follows through — and whether inflation allows them to keep cutting.

Gary McKae
Commercial Real Estate Advisor | Investor Advocate | Author
📍 McKae Properties, Inc.
📧 gary@pacwestcre.com
🌐 www.mckaeproperties.com
📞 (650) 743-7249
📍 2044 Union Street, San Francisco, CA 94123
DRE# 01452438

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