Goldman Sachs was hit by a wave of commercial real estate loan delinquencies in the first quarter, fueled in part by Elon Musk’s refusal to pay Twitter’s rent.
The value of loans to commercial real estate (CRE) borrowers with delinquent payments rose 612 percent to $840 million in the first quarter, according to reports filed by Goldman’s licensed banking entity with the U.S. Federal Deposit Insurance Commission.
That was much higher than the rise in CRE loan delinquencies reported by the entire U.S. banking industry, which rose 30 percent over the same period to just over $12 billion, according to Bankingregdata.com, which compiles the FDIC reports.
The rise in delinquencies at Goldman’s depository business comes as rival banks are warning of mounting losses on commercial real estate loans, most of which are tied to office buildings and were made before the pandemic ushered in a work-from-home situation. culture.
Goldman has much less exposure to commercial real estate lending than its larger rivals. At the end of the first quarter, it had $8.4 billion in outstanding loans backed by commercial real estate, according to the FDIC report. Wells Fargo had $91 billion and Bank of America had $60 billion.
However, the rising delinquencies are another sign of the frustrations the bank has faced as it tries to diversify its business away from its traditional focus on deals and trading.
Goldman was among a group of banks, including Citigroup and Deutsche Bank, that lent $1.7 billion to Columbia Property, a real estate investment trust, against seven office buildings in San Francisco and New York, including two with major offices for Twitter.
Twitter stopped paying its rent in November and Elon Musk, the billionaire owner of the social media network, has told employees he has no plans to pay again or cover back dues, according to lawsuits. Columbia Property, which is suing Twitter over the missed payments, defaulted on the loan in February. Columbia Property declined to comment. Twitter, which has adopted a policy of not responding to the press, was not available for comment.
Given Goldman’s relatively small exposure to the industry, the bad loans will not have a material impact on earnings. “Loans don’t matter much to Goldman,” said Christopher Kotowski, a banking analyst at Oppenheimer. According to Goldman’s own calculations, commercial real estate loans represent less than 20 percent of the bank’s total loan portfolio.
Yet, according to Bankingregdata.com, more than 10 percent of CRE loans held at the banking subsidiary, which accounts for 90 percent of total loans, are in arrears, according to Bankingregdata.com, while the average arrears among its peers are less. than 1 percent.
In SEC filings and discussions with investors, Goldman defines its CRE loans more broadly to include loans to investment firms that buy and sell real estate debt, as well as loans used to aggregate CRE loans into investment securities.
By that measure, delinquencies are lower, but still higher than peer companies. “If you look at all of our commercial real estate lending business, our delinquency rate is below 2 percent,” said Goldman.
However, the FDIC puts these loans, which typically have much lower default rates, in a different category.
Goldman, which became a regulated bank in the wake of the financial crisis, has poured more resources into lending over the past decade. The company now has nearly $180 billion in bank loans outstanding, up from $3 billion a decade ago.
In 2020, Goldman said corporate lending was one of the company’s priorities. “We’re embracing the banking model,” then-CFO Stephen Scherr said during a presentation to investors. “We believe this will be an important source of future benefit to the company.”
The bank has benefited from higher interest rates, with the lending entity’s profit rising to $3.7 billion in the first quarter — a record high and up 20 percent from the same period last year.
Nevertheless, the larger loan book is also a source of potential losses given Goldman’s willingness to lend to riskier corporate borrowers compared to its rivals. Just over 65 percent of commercial loans are to “junk” borrowers without an investment-grade credit rating, compared to 28 percent and 17 percent for JPMorgan Chase and Citi, respectively.
Goldman’s total volume of delinquent loans, according to FDIC data, rose to $3.2 billion at the end of the first quarter, or about 2 percent of outstanding loans, compared to $2.4 billion a year ago.
Most of those are tied to credit cards and other consumer loans, which make up about 65 percent of loan loss provisions, according to Bankregdata.com.
Goldman announced its intention to pull out of consumer lending earlier this year by selling $1 billion worth of loans tied to its Marcus consumer bank.
David Fanger, who follows Goldman for bond rating agency Moody’s Investors Service, said, “While their risk appetite may be greater than other companies, they tend to be more proactive about risk management.”