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On the heels of a debt ceiling debate, Congress recently averted a government shutdown by passing a last-minute stopgap spending bill. But that’s only a short-term solution; a 2023 government shutdown is still a real possibility when the current continuing resolution expires.
A government shutdown occurs when Congress fails to pass the 12 spending bills necessary to fund the federal government. Without enacted funding bills, federal departments and agencies halt all nonessential work and may shut down entire organizations. The government won’t process payroll as long as the shutdown lasts.
“Importantly, many government institutions and personnel are excepted, meaning they will continue to work despite the shutdown,” said Ginger Chambless, Head of Research for Commercial Banking at JPMorgan Chase.
“A government shutdown is far from unprecedented,” Tom LaSalvia, Head of Commercial Real Estate Economics at Moody’s Analytics. Given the current political climate, “Another shutdown seems to be more ‘when’ and ‘how long,’ rather than ‘if.’”
But that doesn’t mean there will be a 2023 government shutdown. “Conflicts abroad could give lawmakers a greater sense of urgency to come together more quickly,” Chambless said.
LaSalvia agreed. “Combined with a looming economic slowdown, neither party wants to take the blame for adding another major economic and political shock into the fray—especially with an election year looming.”
Alternatively, Congress could pass another stopgap bill to temporarily fund the government.
A shutdown could last for days or weeks—the second 2018 shutdown extended into 2019, lasting 34 days. “The impact to economic growth and market sentiment tends to grow the longer the shutdown lasts,” Chambless said.
For example, 2018’s first shutdown lasted two days and had a minimal economic effect, while the 2018-2019 government shutdown had significant impacts, including:
“A shutdown—a show of further government dysfunction—could harm the U.S. government’s credibility and put pressure on government debt,” LaSalvia said. “Any additional shock to interest rates amplifies the already difficult refinance situations for many commercial real estate loans.”
“It’s difficult to predict how interest rates respond to a government shutdown,” Chambless said. “On one hand, views of weaker U.S. governance could drive interest rates higher, while volatile market conditions and increased recession concerns could prompt a flight to quality, pushing treasury yields lower.”
Within the industry, the government plays a greater role in multifamily housing than other sectors. “Low Income Housing Tax Credit, Section 8 and Federal Housing Administration programs are all at risk, but mostly in the form of delays rather than long-lasting impacts,” LaSalvia said.
Government assistance may also be delayed, affecting rental payments. Affordable housing could be hit hardest, but postponed payments could also cause problems for workforce and market-rate rental owners, depending on their mix of residents.
Time is limited. But there are still things multifamily investors can do to prepare, including:
A government shutdown would only heighten market uncertainty. Find out why multifamily marketing is so important in and up-and-down economy.
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