Commercial Real Estate Woes Will Hit Goldman, CEO Says
The jump in interest rates over the past 15 months and the trend toward remote work have hit office real estate hard.
Commercial real estate has tumbled over the past year, with office real estate leading the way.
The FTSE Nareit index of office REITs (real estate investment trusts) has slumped 44% over the last 12 months, more than any other REIT sector that Nareit publishes.
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The U.S. office vacancy hit 12.9% in the first quarter, breaking the high of the financial crisis in 2008. Meanwhile, commercial real estate prices slid in the first quarter for the first time in more than 10 years, according to Moody’s Analytics.
The surge in interest rates over the past 15 months has hit the industry hard, depressing property values. So has the shift to remote work.
Earlier this year, Columbia Property Trust, an office-building owner controlled by money-management titan PIMCO, defaulted on $1.7 billion in loans on seven buildings around the country. Major real estate investor Brookfield has defaulted on buildings in Los Angeles and in the area around Washington, D.C.
With almost $1.5 trillion in commercial mortgages coming due over the next three years, according to data provider Trepp, more trouble is coming.
Goldman’s Woes
Lenders and investors may have to deal with payment restructurings and defaults. Banking stalwart Goldman Sachs (GS) - Get Free Report isn’t immune. It will report losses on commercial real estate loans and equity investments for the second quarter, he told CNBC.
“There’s no question that the real estate market, and in particular commercial real estate, has come under pressure,” Solomon said. “You’ll see some impairments in the lending that would flow through our wholesale provision” this quarter.
Goldman suffered almost $400 million in first-quarter impairments on real estate loans, he said.
Then there are its own real estate investments.
“We think that we and others are marking down those investments given the environment this quarter and in the coming quarters,” Solomon said. The losses are “definitely a headwind” for Goldman, but they are “manageable,” he said.
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