There are sectors and field of endeavors where politics and government play a major role but not as significant as some others. For real estate, on both the residential and commercial side, not only the markets, and overall economy play a huge role, government and the political mainstream have a significant impact on metrics, performance, results and livelihood. This short article will briefly cover some of the short-term impacts and what to look forward to about four government agencies in the real estate sector.
A couple of weeks ago, January the 13th 2019, I alluded in a twitter post, www.twitter.com/refivest, that the government shutdown was poised to lure its tail longer if the major parties involved in making decisions could not come to a solvable compromising agreement. Despite the rates hike that took place in 2018, Federal Reserve Chairman, Jerome Powell and many other financial pundits expressed at the start of 1Q2019 that additional rates hike were not certain for 2019 – obviously, in such an economical state that would be devastating. On January 15th, only two days later I again twitted that this government shutdown was the longest so far in the history of the United States. Some of the major agencies that were impacted, all of which deal with real estate were to some degree: Department of Agriculture, Commerce, Department of Justice, Interior, State, Transportation, and Housing and Urban Development.
During that time here are some of the impacts on four major real estate government in association with capital markets.
- The Small Business Administration (SBA) was inactive due to lack of funding. Owner-occupied buildings, businesses for SBA 504 saw a decline in assistance, let alone approval. That factor also plagued SBA 7a for investors relying on funding for business expansion or acquisition. This was an unfortunate dilemma and more overwhelmingly situation for business owners and building owner-occupied with no strong cash flow or capital reserves. SBA 504 is great for owner-occupied properties and it is viewed more as a mezzanine structure, where there is typically a 1st mortgage of 50% and a 2nd mortgage of 40%, whereby the 2nd mortgage is fully guaranteed. Unlike SBA7a, which is a loan program that helps small businesses acquire commercial real estate, expansion, working capital, etc., SBA 504 has much more owner restrictive penalties, especially when it is issued to developers. After 35 days, the government shutdown has reopened on Friday January 25th, 2019 and lawmakers on both parties Republicans and Democrats have until February 15th to reach a compromise. During the next 3 weeks, is it reasonable for an owner, investor or business to line a string of capital? Yes and No – this will depend entirely on the type of transaction, the bank or financing firm involved, and a multitude of different economic, qualitative and quantitative scenarios.
- Government Sponsored Enterprises (GSEs), specifically Freddie Mac and Fannie Mae were not affected by the shutdown. There is an entire article about the roles of these two GSEs in the market place on this blog platform – if there is an intellectual curiosity to learn more. At a round table discussion about capital markets and volatility I attended at the beginning of 1Q2019, a small developer who has been funded by Freddie Mac a couple times, expressed to me that, “because this is an agency lending he most likely won’t get funded for his next pipeline multifamily deals if the shutdown prolong to the end of 2Q19.” Of course, you will get the right financing in place – I exclaimed. Yes, Freddie is agency lending, however, it is a government-sponsored entity not a government agency, therefore the impact of the shutdown will not affect its servicing and selling functions and that is also true for Fannie Mae.
- Housing and Urban Development (HUD), all the headquarters and regional offices were closed during the shutdown with limited high decision makers available to answer pertinent questions. HUD creates strong, sustainable, inclusive communities and quality affordable homes for all Americans. At the beginning of 1Q2018 the Trump Administration announced a proposed budget for the fiscal year (FY) 2019 for HUD, totaling $41.24 billion spending plan – and part of that budget will also provide funding for assisted multifamily properties that are eligible. Before the government reopened on Friday January 25th, 2019, Learner, a respectable and high rank employee for HUD in a recent article stated, “I don’t think it has many impact on valuations, but in the short-term it could make operations for some of the private owners or rental housing, whether it is for low-income citizens or the elderly, a little more challenging.”
In all, the government shutdown absolutely affected many workers from these government agencies who were furloughed temporarily, except for Freddie Mac and Fannie Mae. In fact, HUD cited that 95% of their workers where furloughed. Consequently, some businesses, owners, and investors who needed funding from these agencies also sat on the sideline in a waiting game due to non-assistance and non-approval. In all, after 35 days the government has reopened again for 3 weeks. Although the sentiments of many financiers remain positive, and yes, funding in many gateway cities and many markets will remain strong. Nonetheless, the turbulence in the economy for the upcoming quarters could loom large for several businesses, owners and investors as well for the remainder of FY 2019 if the government shutdown were to reopen due to political by-partisans inability to come to a strong compromise.
By: Ibsen Alexandre
The opinions expressed herein are those of the author(s) and do not reflect the view of a particular firm, its clients, any respective affiliates nor any Media Platform. This article is for educational general purposes only and is not intended to be and should not be taken as solicitation for investments nor lending.