Goldman’s real estate markdowns drive $212m in Q3 losses

Commercial real estate continues to be a drag on Goldman Sachs’ asset and wealth management business, the New York-based banking giant reported in its third-quarter earnings results.

Within the AWM unit – which includes Goldman Sachs Asset Management, the business that houses its real estate investment management activities – “equity investments generated net losses of $212 million, driven by markdowns on investments in commercial real estate,” said chief financial officer Denis Coleman during the firm’s third-quarter earnings call last week. Additionally, the business’s Q3 2023 operating expenses included impairments of $358 million related to consolidated real estate investments.

With the on-balance sheet alternative investments in its AWM division, Goldman had $9.7 billion in total commercial real estate exposure, including $2.1 billion in loans, $600 million in debt securities, $3.9 billion in equity securities and $3.1 billion in consolidated investment entities. Of that amount, 43 percent comprised historical principal investments, which the firm intends to exit over the medium term.

“We started the year with about $15 billion of commercial real estate alternative investments, that’s been reduced now by about $5 billion,” Coleman said. “Three-quarters of that was either through paydowns or dispositions, the balance through marks and impairments. So we’re making very, very significant progress against those exposures.”

Goldman has either marked or impaired its office sector-related commercial real estate and consolidated investment entity exposure down by about approximately 50 percent this year. For non-office commercial real estate and consolidated investment entity exposures, the impairment is about 15 percent year-to-date, he added.

Goldman held $25 billion, or 14 percent, of total firmwide loans in commercial real estate during Q3 2023, the firm’s Q3 2023 earnings results presentation showed. Forty-six percent of the commercial real estate loan portfolio was investment-grade, while the firm’s $2 billion of office-related loans were primarily secured by Class A office properties. Additionally, the bank has $3.2 billion of commercial real estate-related unfunded lending commitments, including $600 million of office-related commitments, according to the presentation.

“Commercial real estate loans continue to represent a relatively small percentage of our overall lending book,” Coleman noted. “Commercial real estate investments are diversified across geographies and positions, with no single position representing more than 1 percent of the total on-balance sheet alternative investments.”

Goldman’s third-quarter real estate-related losses, however, are roughly half the amount of real estate-related losses the bank reported during Q2 2023 for its AWM unit. During the prior quarter, equity investments showed net losses of $403 million from real estate investments, according to Goldman’s Q2 2023 earnings results presentation. About $305 million of those net losses came primarily from markdowns in its office-related commercial real estate investments in the business’s private portfolio, the presentation showed. Operating expenses during the quarter showed impairments of approximately $485 million related to consolidated real estate investments.

The firm has also reduced its commercial real estate exposure since the previous quarter. Within the business’s on-balance sheet alternative investments, the firm’s commercial real estate holdings in Q2 2023 totaled $12.3 billion, including $4.2 billion in equity securities, $3.3 billion in loans, $700 million in debt securities and $4.1 billion in consolidated investment entity investments.

At the time, approximately 50 percent of the commercial real estate-related on-balance sheet alternative investments were made up of historical principal investments. Similarly, Goldman has scaled back its commercial real estate loan portfolio from the previous quarter, when $27 billion, or 15.4 percent, of total firmwide loans were in commercial real estate.

Prior to Goldman Sachs merging its merchant banking and special situations divisions under its broader asset management umbrella in 2019, the former unit had invested in real estate equity using the bank’s balance sheet capital.