Shutdown and sequestration: Assessing the risks and realities of political gridlock on the office market

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How serious of a problem is sequestration? It depends whom you ask…

What is the impact of the government shutdown on commercial real estate?

A temporary government shutdown will have minimal immediate impact on the commercial office market; essential functions will not be disrupted and the government will continue to fund its financial obligations (e.g. rent payments.)

A long-term shutdown would further delay GSA decision-making, postponing leasing decisions and likely pushing some federal leases into holdover status.

From a psychological perspective, a government shutdown may reinforce the sense of urgency that GSA and individual agencies feel to rein in real estate costs; although the “freeze the footprint” mandate has already been implemented, a shutdown would solidify the importance of the initiative and perhaps spur more aggressive cuts once normal government operations resume.

“Headline risk” associated with the Washington, DC market could deter investors from targeting and acquiring properties with federal tenancies.

What is sequestration and its impact on the market?

Sequestration is a component of the Budget Control Act of 2011, which reduces government spending by implementing across-the-board cuts; federal discretionary spending could drop by as much as 12.1 percent (approximately $900 billion over ten years), unless new legislation is enacted to prevent the plan from being fully implemented.

Sequestration has already had a measurable effect on the Metropolitan Washington, DC office market, contributing to over 3.5 million square feet of occupancy losses, principally within the contractor-heavy region of Northern Virginia.

Tenant demand has declined as a direct result of sequestration and government contractors have insisted upon short-term leases, termination options and expansion/contraction rights in an effort to become more flexible and align their real estate strategies with increasingly uncertain business outlooks.

Click here for more market insight on our Phoenix research group web page: Phoenix – Research

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