The latest U.S. federal government shutdown is beginning to take a toll on commercial properties located near federal buildings, particularly in cities with a heavy government presence such as Washington, D.C., Chicago, and Los Angeles, according to CoStar. While the larger impact on the commercial real estate sector may remain limited in the short term, localized effects are already surfacing in the form of reduced foot traffic, declining sales, and event cancellations.
Retail and Restaurant Tenants Feel the First Wave
Retail and restaurant tenants situated near government offices — especially in the D.C. metro area — are among the first to feel the financial strain. With federal employees furloughed or working without pay, traffic in surrounding business corridors has declined, threatening cash flows for small businesses that rely on a steady weekday presence.
In turn, this raises concerns among landlords about the ability of tenants to meet lease obligations if the shutdown drags on.
D.C. Metro Market Faces Heightened Exposure
The Washington, D.C. region — including parts of Maryland and Northern Virginia — remains the most exposed. Office and mixed-use properties that depend on daytime activity from government workers are already experiencing the early symptoms of softening demand. Hospitality operators, particularly hotels in submarkets close to the capital, report disruptions to group bookings and business travel, which are core demand drivers for many urban hotel properties.
Food and beverage tenants are especially vulnerable. Prior to the shutdown, restaurants in the D.C. area were already reporting a decline in year-over-year sales and foot traffic, according to regional industry data. The shutdown is now accelerating those trends, prompting some commercial landlords to offer short-term relief or support programs to prevent tenant turnover.
Chicago Retailers Near Federal Buildings See Drop in Activity
In downtown Chicago, the impact is similar though less widespread. Retailers near major federal facilities such as the Kluczynski and Metcalfe federal buildings have noted a steep drop in walk-in customers. Jewelry shops and other discretionary retailers are seeing consumers pull back on spending amid economic uncertainty, adding more stress to small retail operators in urban office corridors.
Downtown Los Angeles Hit by Shrinking Foot Traffic
Los Angeles is facing a parallel situation. The civic center area, home to thousands of federal employees and several large government buildings, is seeing lower pedestrian activity, further weakening an area already struggling with vacant retail spaces and underutilized public plazas.
The adjacent Los Angeles Mall — a 1970s-era complex — illustrates this challenge, with sparse foot traffic and increasing vacancies exacerbated by the ongoing shutdown.
CRE Market Watching for Long-Term Impact
While these challenges are mounting in areas closely tied to federal activity, the broader commercial real estate market has not yet shown signs of widespread disruption. Analysts note that real estate typically reacts more slowly to short-term political events, and unless the shutdown continues for several more weeks, the long-term fundamentals for CRE are expected to remain stable.
That said, the longer the shutdown continues, the greater the potential for deeper effects across leasing, hospitality, and investment activity. Prolonged uncertainty could delay tenant decisions, impact rent collections, and lead to temporary adjustments in property valuations, particularly in urban office and mixed-use assets with exposure to government-related demand.
A Stress Test for Government-Adjacent Real Estate
As federal reserves for operations begin to run dry and tourist-dependent attractions face closures, landlords, investors, and tenants alike are watching closely. While not yet a full-blown crisis for commercial real estate, the shutdown is a clear reminder of the sector’s sensitivity to workforce-driven activity and how intertwined it remains with the stability of public sector operations.
