Why Goldman Sachs Strides Into CRE Debt While Many Seek Detours

Read the market reports and you might assume that commercial real estate debt is a risky place to invest. UBS liquidated the CS Real Estate Fund International that came with the Credit Suisse acquisition. CRE delinquency rates have been on the rise. RXR’s CEO said that CRE faces a “new paradigm” of permanently higher interest rates, which only makes refinancing even harder to manage.

And yet, Bloomberg reported that Goldman Sachs is very interested — depending on the property and debt. “Just because there are some problem properties with very high vacancies and a problem with their cost of capital or the cost of debt — that doesn’t mean that the entire asset class has something wrong with it,” Lindsay Rosner, head of multisector investing at the firm, told Bloomberg. “What we’ve been able to do is find a lot of opportunities in commercial mortgage-backed securities.”

The response touches on an important issue in CRE investing — and other types, as well. There are many variations and differences among asset types and individual properties. There are no single takes by categorical.

CMBS special servicing rates have been increasing every month from January through August in 2024, as an example. Office is at the top with the July 2024 special servicing rate of 11.25%, up from 7.33% a year ago. The next highest was retail at 10.89%, only two basis points above the 10.87% rate the prior year. Then mixed-use went from 6.89% in July 2023 to 8.93% in July 2024. Lodging was 7.06% in 2023 and 7.33% in 2024. Multifamily saw an absolute gain to 5.11% from 3.26%. The smallest level of special servicing was industrial’s increase from 0.31% to 0.40%. The change between June and July 2024 was industrial (-3 basis points); lodging (+5 basis points); multifamily (-6 basis points); office (+46 basis points); mixed-use (-41 basis points); and retail (+7 basis points).

Rosner said that a recovery across all offices seems unlikely. However, an 11.25% special servicing rate isn’t 100%. Some of these office properties may have no chance of recovery. Others, though, will have. There are likely to be opportunities within offices.

Some other categories like industrial are in much better shape. Rosner noted that warehouse debt having value as CRE debt generally has outperformed investment-grade corporates.

And as many investors say they’ll continue to sit out on activity until 2025, which leaves opportunities for those who pick out the best property choices.