Key Takeaways from our Commercial Real Estate Symposium in New York
February 12, 2025
The real estate market was transformed over the last five years by a compressed period of intense rate hikes and emerging secular trends that dislocated many sub-asset classes and created unique investment opportunities. At the Goldman Sachs Commercial Real Estate Symposium, a community of ~150 real estate industry leaders gathered to share insights and engage in dialogue on factors shaping the macroeconomic outlook, affordable housing challenges, AI and data centers, and more.
Laying the foundation: the macroeconomic landscape
“It’s going to be a bit tough sledding to expect rates to materially go lower, especially in the higher end of the curve.” —Jeff Goldenberg, director of portfolio strategy, Investment Strategy Group, Goldman Sachs
In the commercial real estate sector, Goldman Sachs Wealth Management Investment Strategy Group (“ISG”) believes a confluence of market factors has helped stabilize commercial real estate prices in recent months—non-office vacancy rates remain low, rent and supply growth have moderated, and the construction pipeline has declined significantly. Prices since the pandemic are still substantially below prior highs, creating opportunity looking forward. The potential for less regulation on the banking system may also positively impact flexibility on financing costs (as of February 2025).
Investing and financing: perspectives on opportunities, themes, and activities in commercial real estate
“The way we try to invest in US real estate is to create the real estate expression of the firm’s view around US exceptionalism.”—Jim Garman, global head, Real Estate Asset Management, Goldman Sachs
Goldman Sachs analysts believe the commercial real estate market largely bottomed out toward the end of last year, but certain segments are deflating rather than inflating. Selecting assets in the right markets and sectors (such as high-quality industrial, distribution, and housing assets) is paramount. Capital markets opening and buyer demand have created a lot of dry powder, with large banks looking for good opportunities to add commercial real estate to their balance sheets. Goldman Sachs is investing in logistics, housing, advanced manufacturing, and industrial projects in locations boosted by onshoring trends—such as Savannah, Austin, and Phoenix. Despite interest rate volatility, high net worth investors have been opportunistic in the CRE market by evaluating investments through recent values and a replacement cost analysis—where today’s prices look attractive on a relative basis. While institutional investors have shied away during this period of volatility, they are returning as prices become clearer.
Looking at opportunities ahead, developers are pivoting from construction to leveraging in-house expertise on specific segments to cross over and make differentiated investments in the credit market. On the equity side, investors are looking to buy traditional core-plus assets at a discount to replacement cost at value-add returns. As rents go up and construction costs stabilize, development opportunities will likely arise to mitigate supply constraints. On the credit side, the $3 trillion debt in the market has to be refinanced and solutions are being explored across every type of lending.
Building solutions: the affordable housing challenge
“This is an issue that’s now — it’s urban, it’s rural, it’s the coast, it’s southern. The depth and breadth of the affordable housing challenge is just something we’ve never seen before.” —Margaret Anadu, senior partner, The Vistria Group
Affordable housing developers are strained by inflation, rising interest rates and construction costs, limited land availability, and restrictive zoning. To meet these challenges, revenue and expense support are needed from both the private and public sector.
On the private side, institutional capital can access rapidly growing opportunities in affordable housing with supreme risk-adjusted returns and acyclical, durable cash flows. Common vehicles include targeted funds, large-scale portfolio acquisitions, or creative financing on portfolio-wide debt at attractive fixed-rate costs. As investors see the supply constraints, capital is flowing in to create and preserve affordable housing.
Climate risk posed by extreme weather and rising insurance costs in certain states is also top of mind for investors. Anadu believes the risk is the same for affordable housing and the broader real estate market, but it may be weighed differently based on an investor’s objectives. “If you’re a market-rate multifamily investor, there are places where you can be hands off and say I just don’t want to take the climate risk in X, Y, and Z geography,” said Anadu. “Whereas if you’re approaching this work from a purely impact perspective, you might be loath to avoid significant affordability challenges solely because of climate risk.”
On the public side, developers have been sustained through access to repeatable programs, such as rental assistance and property tax incentives. Anadu believes all of the needed policies exist—it is a matter of whether they are consistently supported, not politicized, and tailored to locality-specific differences. When the regulatory environment constrains public financing, Ben Herbst noted he has seen developers still looking to earn fees for construction without being the project’s long-term owner. He noted how tax-exempt bonds are an incredible tool for affordable housing in New York City, but due to the limits placed on them, he’s seen developers look for alternative delivery mechanisms—for example, partnering with non-profits to be able to deliver them on a 501(c)(3) basis, which has potential additional financing benefits.
AI and data centers in real estate
“Think about where the internet was two years in…It will get you thinking about what the future of AI can be and how early in this journey we are.” —Jason Tofsky, Americas head, Telecommunications Investment Banking, Goldman Sachs
There is immense potential and profitability with AI and data centers. Demand for AI data centers continues to soar and unlike cloud centers, they can be easily located in secondary markets. In general, across data center investment, the amount of speculation risk has been very low. In the current environment, up to 90% of data center leasing volume is pre-leased. Many projects are now pre-leased on 10+ year contracts with investment-grade companies who make ongoing investments in these sites.
One of the less talked about offshoots of development spend is the need to find liquidity for the dollars that have gone into the ground thus far. There’s a massive opportunity for the financial industry to help them generate liquidity by forming investment vehicles around these projects—with lower returns, low risk, and longer-term contracted cash flow profiles—that will be attractive to core fund or insurance investors.
Demand for compute could grow even further as reductions in model development costs allow every Fortune 500 company to train a proprietary model that leverages public and proprietary information, creating massive inference workloads. The significant volume of data center leasing in traditional and less traditional markets draws power away from the grid in a way that creates opportunity for microgrids and behind the meter power solutions—which is yet another AI infrastructure adjacent investment opportunity. There’s also been attention on the “powered land” adjacent opportunity set. Of course, interested investors need to carefully assess these sites and understand how quickly or easily power can be brought there—but this is an area of investment with very high return potential where the market is also increasingly focused.
Conversation with Francis Greenburger and Scott Rechler
“There’s always chaos before clarity. Just keep moving through the fog, not knowing exactly how that journey is going to take you, but ultimately keeping your eye on where you want to get to.” —Scott Rechler, chairman & CEO, RXR
Greenburger, chairman and CEO of Time Equities, Inc., shared how diversification during turbulent times has helped his real estate company balance underperforming and high-performing segments, absorb inevitable shocks, and create flexibility for opportunistic purchases of stabilized and heavily discounted properties.
Rechler explained that his company took an opposite approach, leaning on deep expertise in the office sector to find opportunities. Similar to how successful malls became experiential destinations after the rise of e-commerce, his company focused on magnetic office spaces post-COVID. They have been able to secure investment-grade loans to enable high-quality construction projects near public transit, even in the current environment.
As a board member of the New York Federal Reserve, Rechler also shared his perspective that today’s interest rate levels may be the new normal—as macro tailwinds drive growth of the US economy, data shows stubborn inflation, and the Federal Reserve is exercising greater caution around rate reductions.
The participants herein may have relationships with the Firm, including Wealth Management.
Investment Strategy Group (“ISG”). The Investment Strategy Group, part of the Asset & Wealth Management business (“AWM”) of GS., focuses on asset allocation strategy formation and market analysis for GS Wealth Management. Any information that references ISG, including their model portfolios, represents the views of ISG, is not financial research and is not a product of GS Global Investment Research and may vary significantly from views expressed by individual portfolio management teams within AWM, or other groups at GS.
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