Most of Wall Street is panicking about commercial real estate – but Goldman Sachs says there's little chance it triggers a financial crisis

Office loan delinquencies could fuel the next stage of the US regional banking crisis, Goldman Sachs has warned.

Brendan McDermid/Reuters

• 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 spooked by the struggling sector, according to Goldman Sachs.
• There’s limited risk of “a vicious circle of large leveraged losses,” strategists said in a research note.

It seems like there are three words on the lips of every investor now that panic around the US's regional banking sector is starting to die down: commercial real estate.

Big names ranging from Bill Ackman and Elon Musk to Bank of America and JPMorgan have predicted that 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 circle 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 published Monday.

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

Hartnett believes that a wave of upcoming refinancings of commercial real estate loans at much higher interest rates than in the past could spark a credit crunch in the sector, sending stocks spiraling and the economy into a recession.

The collapse of Silicon Valley Bank and Signature last month could also further fuel the turmoil in commercial real estate – because rattled lenders looking to trim their balance sheets might become less willing to offer financing to property owners.

While Karoui and Viswanathan are anticipating massive issues in the office sector – an area that other strategists have expressed concern about as well – they believe that apartments, manufacturing plants, warehouses, and other types of commercial real estate are better-capitalized and won't suffer a huge crash.

"We expect office loan delinquencies to materially increase, but think this is unlikely to lead to systemic risk given healthier fundamentals in other commercial real estate subsectors," the Goldman Sachs strategists said.

The turmoil will likely be contained to office loan delinquencies "given healthier fundamentals in other commercial real estate sub-sectors such as apartment and industrial properties, as well as in other parts of credit markets," Karoui and Viswanathan added.

Read more: Commercial real estate could be where the next economic shock comes from. Here's what Elon Musk, Bill Ackman, and 5 others have predicted.

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