Goldman Sachs CEO Highlights Risks in Commercial Real Estate Sector
Goldman Sachs CEO David Solomon joined CNBC’s Squawk on the Street on Monday to discuss the resilience of the global economy and the risks his bank faces in the commercial real estate sector. Here are the main takeaways from his interview.
Resilient economy shocks CEO
Solomon described the global economy as “incredibly resilient,” a statement that surprised him considering how uncertain the economic environment has been over the past year. Despite this resilience, Solomon noted that there are still certain risks looming on the horizon, particularly in commercial real estate.
Real estate under pressure
Solomon commented on an article in the Financial Times claiming that Goldman Sachs’ portfolio was experiencing a surge in commercial real estate loan delinquencies. Real estate is the “single largest asset class in the world,” Solomon said, and the Federal Reserve’s aggressive interest rate hikes have put significant pressure on the commercial real estate market. Solomon said that although most of Goldman Sachs’ lending portfolio is relatively small compared to other lenders, the bank does hold a reasonable amount of equity investments in real estate.
Impairments and marked-down investments
During the last quarter, Goldman Sachs experienced nearly $400 million of impairments to consolidated real estate investments. Solomon expects this trend to continue, and the bank is marking down its equity investments because of the current environment. Despite these challenges, Solomon believes that Goldman Sachs’ commercial real estate headwinds are manageable due to the bank’s overall size.
How real estate sector affects the economy
The risks in commercial real estate have ramifications beyond real estate borrowers and lenders. Solomon said that commercial real estate assets constrain lending, pointing out that 65% of commercial lending is in the regional and midsize banking system. This could lead to capital becoming more attractive and could crowd out some economic activity, a challenge that needs to be “worked through.” Solomon notes that there will likely be some bumps and pain for participants going forward.
Soft landing possible, but challenges ahead
Solomon expressed his belief that the economy could manage a soft landing despite remaining uncertain. Even without a recession, it could feel like one given the current environment. However, inflation is sticky, and there’s a chance that rates will go higher and make the economic environment more challenging.
Commercial real estate three headwinds
Goldman Sachs analysts have previously suggested that borrowers in commercial real estate are at a higher risk of payment shock because of downward pressure on net operating income. They cited three primary headwinds: borrowers exposed to higher interest rates, lending standards tightening, and refinancing becoming painful.
Conclusion
Goldman Sachs CEO David Solomon remains optimistic about the resilience of the economy, but acknowledges that there are risks, particularly in commercial real estate. Despite these challenges, he believes that Goldman Sachs is well-positioned to manage its commercial real estate headwinds. However, the real estate sector has ramifications beyond real estate borrowers, lenders, and investors, and Solomon believes that working through the related challenges will be challenging but manageable.
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