Goldman Sachs CEO David Solomon warns of pain ahead for commercial real estate

Goldman Sachs CEO, David Solomon, announced on Monday that the bank would disclose markdowns on its commercial real estate holdings due to the impact of higher interest rates. Solomon stated that impairments would be posted on loans and equity investments related to commercial real estate in the second quarter. These impairments are recognized by financial institutions when there are loan defaults and declining valuations, which affect quarterly results.

Solomon acknowledged that the real estate market, particularly commercial real estate, has been facing significant pressure. Factors such as higher borrowing costs and lower occupancy rates due to remote work have led to a painful adjustment in the industry. Some property owners have chosen to walk away from their holdings rather than refinance their loans. As a result, banks are starting to witness defaults in their results. In the first quarter, Goldman Sachs reported nearly $400 million in impairments on real estate loans.

Aside from its lending activities, Goldman Sachs has also made direct investments in real estate as part of its increased focus on alternative investments over the past decade. Solomon mentioned that the bank, along with others, is marking down these investments in response to the current environment, both in the second quarter and in the coming quarters.

While the write-downs pose a challenge for the bank, Solomon believes they are manageable within the broader context of Goldman Sachs' business. However, he noted that smaller banks may find them more difficult to handle. Regional and midsize institutions account for about two-thirds of the industry's loan originations. Solomon acknowledged that working through this situation might involve some bumps and pain for several participants.

During the interview, Solomon expressed his surprise at the resilience of the U.S. economy and mentioned that he was observing positive signs emerging in the capital markets after a period of subdued activity.