“There's going to have to be a very organized public and private partnership to figure out a careful unwind of this current dynamic,” he says. As these loans mature, he says banks aren’t necessarily in a position to take these assets back on their balance sheets and simultaneously invest in them to stabilize their value or reposition them for a different market.
As sustainability becomes a bigger concern, there’s a large swath of buildings that were developed more than 50 years ago that require investment. In many cases, valuations in commercial real estate will probably drop further, Jeffrey Fine, global head of Real Estate Client solutions and product strategy in the firm's Asset and Wealth Management business, says in the Exchanges podcast. “At a higher level, it's really the inability of the asset class to adjust to the prospect of a higher, for longer, cost of funding” that’s putting so much stress on the market, Karoui says. Securitization and CMBS issuance have fallen compared to last year. Smaller banks, which provide much of the financing for commercial real estate, are under pressure following the collapse of Silicon Valley Bank. A substantial portion of commercial real estate loans are floating rate, which makes them particularly vulnerable to Fed policy, and a large chunk of the debt will mature in the next two years. Commercial lending by national and regional banks tends to be relatively evenly distributed among the markets.Ĭommercial real estate has been under stress amid a rapid increase in interest rates as the Federal Reserve seeks to contain inflation, Chief Credit Strategist Lotfi Karoui says in an episode of Exchanges at Goldman Sachs. International banks, CMBS, investor groups, and insurance companies made up around 65% of loans in major markets since 2019, while office loans from smaller banks are more heavily skewed towards smaller markets, according to Goldman Sachs Research. Large national and regional banks are more evenly distributed among the office subtypes, but with an emphasis on suburban (22% share of lending) and medical offices (30% share). Local and smaller banks are much more skewed toward suburban offices (31% share of the market) and medical offices (43%), versus just a 10% share of loans for central metropolitan offices. International banks, commercial-mortgage backed securities (CMBS) and investor groups to tend have a higher concentration of loans in central businesses districts, averaging a 71% share of the market. While banks hold more than half of the $5.6 trillion of outstanding commercial real-estate debt, according to Goldman Sachs Research, the composition of lenders tends to be different for large and small offices.
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