After being asked about a Financial Times article reporting a surge in commercial real estate loan delinquencies in Goldman Sachs’ portfolio, Solomon told CNBC that real estate is the “single largest asset class in the world.” And as the Federal Reserve aggressively raised interest rates in an attempt to lower inflation, it has significantly affected the commercial real estate sector. 

“There’s no question that the real estate market, in particular commercial real estate, has come under pressure,” Solomon said.  

Solomon said that his bank has a relatively small lending portfolio compared to other lenders, but it does hold a reasonable amount of equity investments in real estate.

“Real estate affects us,” Solomon said.

That being said, in the last quarter, Goldman Sachs showed close to $400 million of “impairments” to its consolidated real estate investments, Solomon said, adding that the bank will see more impairments this quarter. As for its equity investments in real estate on its balance sheet, Goldman Sachs is marking down those investments given the current environment, Solomon said, adding that it’ll likely continue to do so in the coming quarters. Still he maintains that because of the overall size of the bank, the commercial real estate headwinds that exist for the firm are manageable. 

As for Solomon’s view on the impact of commercial real estate, and how the sector is faring, on the overall economy, he simply said “it constrains lending,” because financial institutions have these assets on their lending balance sheet. Additionally, while it may be manageable for Goldman Sachs, Solomon said that 65% of commercial lending falls into the regional and midsize banking system. 

“In this environment, that will constrain more additional lending, that makes capital more attractive and it crowds out some economic activity, and that’s just something that we’re gonna have to work through,” Solomon said. “And there will probably be some bumps and some pain along the way for a number of participants.” 

Whether or not the economy will enter a recession is still widely debated, although Solomon seems to suggest we should be able to manage a soft landing (or softer landing, as he put it). However, Solomon said that even without a recession, it could certainly feel like one given the current economic environment. 

Still, he thinks inflation is still sticky, and there’s a chance that rates will go higher—although that might not necessarily be this week as a number of watchers are suggesting the Fed will pause its rate hikes for the June meeting.

“I’m not a good predictor of where interest rates will go,” Solomon said. “But I do think given what’s going on, the way we’ve tightened economic conditions, we still have stubborn inflation, there’s really a chance that rates go higher and if they do, that probably is going to make the economic environment a little bit more challenging.” 

It’s clear that when interest rates go up, it becomes a much tougher environment for borrowers, particularly commercial real estate borrowers that are largely dependent on debt. Goldman Sachs analysts have previously suggested that borrowers are at a higher risk of payment shock on their liabilities because of downward pressure on net operating income.

Although their focus was primarily on office, arguing that multifamily and industrial properties have remained relatively resilient, Goldman Sachs analysts pointed to three headwinds ahead for the sector. First, commercial real estate borrowers are exposed to higher interest rates. Second, lending standards will tighten further. And third, refinancing will be painful for those exact reasons.