Looming Government Shutdown Could Hurt D.C.-Area Economy, Experts Warn

UPDATE, JAN. 20, 11:30 A.M. EST: The government shut down Saturday at 12:00 a.m. EST after the Senate failed to pass a deal to extend federal spending.  

The federal government is on the brink of its second shutdown in five years if Congress does not pass a spending agreement by midnight, and top D.C. commercial real estate experts are concerned about how that could affect the area's economy. 

The 16-day government shutdown in October 2013 cost the D.C. area $400M a week in lost economic activity, District officials said at the time. Mayor Muriel Bowser this morning said D.C. would step in and provide services such as trash collection at National Park Services properties to try to soften the impact on the District. But depending on the length of a potential shutdown, it could hurt D.C's retail demand, office leasing and other economic factors that affect commercial real estate, leaving industry leaders frustrated. 

"We're on the brink of a government shutdown again, and I'm not too pleased with that," said Akridge founder Chip Akridge, who also founded and chairs the Trust for the National Mall. "It doesn't make for a very calm business environment here in the private sector. We know what it's like to have a government shutdown and it's not a good thing for Washington. It looks to me that the idiots want to do it again." 

The most immediate impact of a shutdown could be felt in the retail sector. When the government shuts down, federal employees deemed non-essential are furloughed for days or even weeks. 

During the 2013 shutdown, an estimated 60% of the 380,000 federal workers in the D.C. area were sent home, Washingtonian Magazine reported. Being sent home from work would likely discourage these federal workers from spending money at local businesses, Transwestern Managing Research Director Elizabeth Norton said. 

"The federal workforce going without pay would limit them from going out to restaurants, and that could impact the retail sector," Norton said. 

A decrease in tourism resulting from the shutdown could also hurt D.C.-area businesses, Norton said. Tourist destinations in the nation's capital such as Smithsonian museums, the Lincoln Memorial and the National Zoo closed to visitors during the 2013 shutdown. The closing of national parks resulted in a nationwide loss of an estimated 750,000 daily visitors and $500M in lost visitor spending during the last shutdown, the National Park Service estimated. 

Many D.C.-area office landlords with federal tenants are concerned about what a government shutdown could mean for their buildings. JLL Managing Director Joseph Brennan, who runs the firm's Government Investor Services practice, said he has received several phone calls this week from investors worried about whether their federal tenants will submit the next rent payment.

As long as a potential shutdown remains short — the longest shutdown has lasted 21 days — landlords have nothing to worry about, Brennan said.  

"It's not going to hurt your investment," Brennan said. "They're going to pay the rent, and you should fulfill your lease obligations ... The broader question I don't think anyone has the answer to is what happens if it goes 60 or 90 days and gets into two or three rent payments." 

A shutdown could also affect ongoing projects the General Services Administration is working on, such as build-outs of new offices and lease negotiations, Colliers Executive Vice President of Government Solutions Kurt Stout said. 

"It's certainly a headache if you're in the middle of negotiations and you're hitting the pause button," Stout said. "If there are projects occurring in buildings such as tenant improvements, it's difficult to keep them moving ... if you're due reimbursements for certain expenses, for taxes or reimbursable work authorizations, those might be delayed. There are a lot of reasons a shutdown is very frustrating." 

While he does not believe a likely short-term shutdown would have a measurable impact on the office market, Brennan said the ongoing pattern of Congress passing short-term continuing resolutions to fund the government rather than long-term budgets has had a negative effect. Government contractors make up a significant part of the D.C.-area's tenant base, especially in Northern Virginia, and agencies such as the Department of Defense rely on long-term budgets to award contracts that allow contractors to commit to office space, Brennan said.  

"You can't do that when the government is being run under short-term continuing resolutions," Brennan said. "Those contract-contingent lease deals, which are a huge part of what has driven Northern Virginia forever, have been dramatically reduced." 

D.C. office landlords had widely expressed optimism following the 2016 election that having one party control the White House and Congress could alleviate political gridlock, allowing easier passage of laws and budgets that create demand for office space. But with a government shutdown looming despite the Republicans having control of both ends of Pennsylvania Avenue, some of that optimism has turned into frustration. 

"It's disappointing," said Akridge, who had felt hopeful ahead of the inauguration. "I thought there was a real opportunity here to create a new paradigm for the private sector and government to work together for better outcomes for all. Now we're just back into petty bickering and playing politics and trying to make sure we stay elected." 

While Congress and the White House may be unified in terms of party, Norton said the lack of a budget deal shows there are still challenges in bringing the two chambers and the president to agreement. 

"The threat of a shutdown and a shutdown itself is part of the larger concern around uncertainty that has plagued the Washington market," Norton said. "We remain a government town, and we depend on government spending. When the government can't agree on spending, it makes it difficult for agencies to plan spending and that impacts decision-making."