Big Funds Line Up to Fill in for Bank CRE Lending Pullback

Goldman Sachs Group, through its Goldman Sachs Alternatives division, just raised from third parties $3.6 billion for its CRE debt fund, West Street Real Estate Credit Partners IV, according to Bloomberg. The amount is a record for the company, leaving its previous $2.6 billion fund far behind.

Goldman is also adding an additional $1.4 billion capital from its balance sheet, bringing the fund’s total to $5 billion. Adding $2 billion in leverage, that means $7 billion to invest. After fees, the target return is reportedly in the 10% to 12% range. Of the total, $1.8 billion is reportedly already committed.

“The strategy really is to capitalize on what we think is a growing supply-and-demand gap for real estate debt financing,” Richard Spencer, chief investment officer for real estate credit at Goldman Sachs Alternatives, told Bloomberg in an interview.

The fund will originate, underwrite, and hold loans, making first-lien loans to properties that are undergoing rehab/refurbishment, a change of use, or development. Another target is mezzanine financing to stabilized properties.

The Goldman move is the latest in a pattern of big money getting into CRE debt funds. The demand is high with banks having backed away from lending in the area, and they’re continuing to tighten standards. That’s led to reduced demand because many borrowers can’t satisfy requirements. In office alone, CBRE has estimated that US owners would face a $52.9 billion financing gap in 2024 alone.

In January, SL Green started raising money for a planned $1 billion debt fund. Walker & Dunlop Investors Partners closed its first evergreen debt fund that would support between $450 million and $600 million in lending capacity.

There’s been a growing number since.

Reuters recently reported that US fund firms PGIM, LaSalle, and Nuveen; Canada’s Brookfield and QuadReal; Britain’s M&G, Schroders, and Aviva; and France’s AXA are expanding their reach into private CRE debt. They tend to be focused on logistics, data centers, multifamily, and Class-A and trophy office. These alternative lenders think the worst has passed the CRE markets.

“The challenges faced by the banks have really led to a decrease in direct (loan) originations for commercial real estate,” Nailah Flake, managing partner in Brookfield’s Real Estate Group, told Reuters.

Although debt funds have a lot of capital, they also expect elevated returns beyond what many borrowers want to pay, which might mean that they might remain on the sidelines while looking for deals that will satisfy them.