The 1988 Worker Adjustment and Retraining Notification Act, or WARN, requires companies with more than 100 employees to notify workers in writing 60 days prior to mass layoffs. But large defense contractors in the Washington region have not done so, taking the Obama administration's word that they will be reimbursed for any WARN Act violations if sequestration goes into effect 60 days from now. This is unprecedented, as the Heritage Foundation's Hans von Spakovsky noted: "The White House is telling defense contractors that the American taxpayer will compensate them for any liability incurred for violating federal law."
Sequestration looms unless Congress averts $1.2 trillion in automatic cuts, mostly in defense, before the Jan. 1 deadline. The threat is already causing a dominolike effect in the Washington region's commercial real estate market.
Three of the area's largest real estate brokerage firms report that office leasing in the third quarter of this year fell by a third in the greater Washington region, and by 20 percent in the District, as employers take a wait-and-see attitude before signing leases. This brings the total "negative absorption" rate to 1.8 million square feet, according to the Washington Business Journal.
Many businesses are now demanding short-term leases with escape clauses, but many commercial buildings with high vacancy rates and expiring loans need to be refinanced. They can't provide leases on such terms because they are still dealing with the double impact of the recession and several years of "right-sizing" by federal agencies. One commercial real estate expert told The Washington Examiner that "virtually none of the assets with either current or near-term 20 percent vacancy rates will be 'bankable' if sequestration is fully implemented."
Many commercial real estate loans contain provisions that trigger default if occupancy rates fall below a certain percentage. This means that mass commercial foreclosures could occur even if mass layoffs are averted -- a devastating blow to the local economy.
Democrats and Republicans claim it will never come to that, but sequestration still remains on the books, and time is running out. Last month, Aerospace Industries Association CEO Marion Blakey urged Congress and the White House to begin negotiating immediately rather than waiting until the lame-duck session to resolve their differences. Unfortunately, that never happened.
So consider this a WARN-ing for Washington-area defense contractors, their employees and the numerous other local businesses that support them: Sequestration is two months away.