noted Goldman Sachs CEO David Solomon has issued a cautionary statement regarding the commercial real estate sector, highlighting the impact of higher interest rates on the industry. In an interview with CNBC’s Sara Eisen, Solomon revealed that his bank would disclose markdowns on commercial real estate holdings in the second quarter.
As loan defaults and declining property valuations translate into write-downs that affect quarterly results, Solomon emphasized the mounting pressure on the real estate market, particularly within the commercial sector. He stated, “There’s no question that the real estate market, and in particular commercial real estate, has come under pressure.” The impairments on loans and equity investments tied to commercial real estate will be reflected in Goldman Sachs’ wholesale provision this quarter.
The industry is undergoing a challenging adjustment period due to rising borrowing costs and lower occupancy rates, brought about by the transition to remote work. Property owners are faced with the choice of either refinancing their loans or relinquishing their holdings, leading to a rise in defaults, which are beginning to manifest in banks’ financial results. In the first quarter, Goldman Sachs reported nearly $400 million in impairments on real estate loans.
In addition to its lending activities, Goldman Sachs has made direct investments in real estate as part of its increased focus on alternative investments in recent years. Solomon acknowledged that the current environment would necessitate marking down these investments, not only in the current quarter but also in the forthcoming ones.
While the write-downs present a challenge for the bank, Solomon reassured that they are manageable within the broader scope of Goldman Sachs’ business. However, he expressed concern that smaller banks may find them more difficult to navigate. Regional and midsize institutions account for about two-thirds of the industry’s loans, and Solomon acknowledged that they would face obstacles and pain in the process.
During the interview, Solomon also expressed surprise at the resilience of the U.S. economy and the emergence of positive signs (“green shoots”) following a period of subdued capital markets activities.