Goldman Sachs Challenges Wall Street Consensus

  • Bill Ackman, Bank of America and JPMorgan have all warned that commercial real estate could cause an economic shock.
  • But they shouldn’t be so scared off by the struggling sector, according to Goldman Sachs.
  • There is a limited risk of a “vicious circle of big leveraged losses,” the strategists said in a research note.

There seem to be three words on every investor’s lips now that the panic around the US regional banking sector is starting to fade: commercial real estate.

Big names ranging from Bill Ackman and Elon Musk at Bank of America and JPMorgan predicted the troubled sector will be where the next cracks appear in the US financial system – but Goldman Sachs bucked that trend this week.

“The risk of a vicious cycle of large leveraged losses and undercapitalized balance sheets that would pose a threat to financial stability is still limited,” strategists Lotfi Karoui and Vinay Viswanathan said in a research note released Monday. .

Goldman Sachs’ view clashes with that of analysts such as Bank of America’s Michael Hartnett, who said in a research note last week that commercial real estate would probably be the “next shoe to drop as lending standards…tighten further. »

Hartnett thinks a flurry of upcoming refinances of commercial real estate loans at much higher interest rates than in the past could spark a credit crunch in the sector, sending stocks soaring and plunging the economy into a tailspin. recession.

The collapse of Silicon Valley Bank and Signature last month could also further fuel the commercial real estate turmoil as shaken lenders looking to shrink their balance sheets may become less willing to offer financing to homeowners.

While Karoui and Viswanathan anticipate massive problems in the office sector – an area that other strategists are also concerned about – they believe that apartments, manufacturing plants, warehouses and other types of commercial real estate are better capitalized. and will not. suffer a huge crash.

“We expect office loan delinquencies to rise significantly, but believe this should not pose systemic risk given the healthier fundamentals in other commercial real estate sub-sectors,” they said. said Goldman Sachs strategists.

The turmoil will likely be limited to delinquencies on office loans “given healthier fundamentals in other commercial real estate sub-sectors such as apartments and industrial properties, as well as in other parts of the housing markets. credit,” added Karoui and Viswanathan.

Learn more: Commercial real estate could be the source of the next economic shock. Here’s what Elon Musk, Bill Ackman and 5 others predicted.

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