A wall of debt, a financing crunch and plummeting building values are looming over commercial real estate, menacing investors and banks, but Goldman Sachs Asset Management is a buyer.
“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,” said Lindsay Rosner, head of multisector investing at the firm. “What we’ve been able to do is find a lot of opportunities in commercial mortgage-backed securities.”
Rosner — who describes CMBS as a market that “people were nervous about” — is focused on “very special properties that are super desirable”. It pays to be picky as an across-the-board recovery in offices is unlikely with remote work persisting, she told the Bloomberg Intelligence Credit Edge podcast.
Goldman also sees value in the debt of industrial warehouses used for logistics, and prefers CMBS to corporate bonds, according to Rosner. Despite all the doom and gloom predicting the pandemic would lead to empty buildings and a slew of defaults, commercial property debt has managed to outperform that of investment-grade corporates this year.
“Relative value is really there,” she said, referring to CMBS. “It is a good portion of our portfolio and we think it generates a decent amount of carry.”
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Rosner is generally positive on the outlook for credit markets because “there is still yield”, and while the economy is softening, she sees the odds of a US recession at only about 15% to 20%.
In investment-grade debt, Goldman likes financial-sector issuers, which she said have outperformed on an excess-return basis.
“It’s not just US money-center banks,” said Rosner, who focuses on public fixed income at Goldman. “There was an opportunity in French banks where there was uncertainty around the French election.”
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Goldman is meanwhile steering clear of utility-sector bonds, based on the high cost of the green transition. “That is just going to place them in a different kind of balance sheet posture than we think is advantageous to being a bondholder,” said Rosner.
By ratings bucket, Rosner favors BBB rated companies, which have retained cash and not increased leverage. “Triple Bs are still a part of the market that we really like,” she said.
Rosner prefers shorter-maturity Treasury bonds given the likelihood of curve steepening after the US election.
“Neither candidate is running on a fiscal restraint program,” Rosner said. “The Treasury curve could really steepen out,” she said, adding that maturities of three- to five-years look most appealing in that scenario.
Chart: Bloomberg
