Miriam Wheeler on Goldman Sachs’ Digital Lending Program for the Middle Market – Commercial Property Executive


Miriam Wheeler

Goldman Sachs expands mid-market driving business with digital platform. Borrowers in the $5-35 million range can access the “Digital CMBS” website, enter property-level information, and get personalized indicative quotes in real time. CPE spoke with Miriam Wheeler, Goldman Sachs Partner and Head of the Americas Real Estate Finance Group within the Investment Banking Division, about the details of the new product and how CMBS is responding to economic uncertainty.

What is Goldman Sachs’ strategy behind Digital CMBS?

Wheeler: We have been in the duct business for a long time. Our conduit business is where we provide smaller fixed rate loans ranging from $5 million and up. We want to expand our driving business into the middle market, and we want to embrace technology and do it in a digital format.

The idea is that our potential borrowers can go online and get an idea of ​​what their borrowing costs might be in a really easy to use web format. We hope this is both a service for borrowers and also helps us generate new business. We would love to eventually be an intermediary loan provider for people using our platform.

READ ALSO: Why office loans are few and far between

Why is this the right new product for today’s market?

Wheeler: We are clearly in a very volatile environment, as we have all experienced. I think one of the advantages of this digital platform is that it gives real-time information. You can go online anytime and get an up-to-date indication of where you could borrow generically today.

Additionally, we pride ourselves on trying to be on the cutting edge as a company and doing more digitally. Real estate has always been a business that has been slightly less impacted by technology than perhaps some other sectors. We really strive to bring technology to real estate and use it to connect with more potential borrowers than we otherwise would in our real estate practice.

Tell readers about the development process of a product like this.

Wheeler: One of our engineers, Jeff Rabinowitz, had the idea for this product over a year ago. He had thought about what we could automate, what we could do with technology across the entire investment banking division. We partnered with him and thought it could be great for our business because we want to embrace technology and we want to reach more borrowers. So it was actually his idea, and we’ve spent the last nine to 12 months figuring out what borrowers would want to see from us. We’re really excited for it to launch, and Jeff has been amazing being the mastermind behind it.

Besides going online to chat with you, what other aspects of the process will be automated?

Wheeler: Borrowers will be able to get personalized, real-time indicative quotes of where we might lend today based on the data they enter on our website, including high-level property characteristics. This type of immediate feedback, based on the information provided, will significantly reduce the process time. Hopefully this makes the process of getting a loan easier and faster. Beyond that, we generally focus on streamlining our entire process and exploring areas where further digitization might make sense. And so, in addition to this digital storefront, we want to try to make the process of closing a loan as painless as possible for our borrowers.

Will the due diligence process also be automated?

Wheeler: Nope. The due diligence will follow a typical process which is not automated. But we think it’s down to pretty good science. We generally find that borrowers are generally satisfied with our process.

Otherwise, why would this product attract borrowers?

It’s an interesting time for borrowers to consider a fixed rate product. Much of the borrowing taken out over the past two years was variable rate, and the challenge with variable rate is that in a rising rate environment, your interest costs are unknown in the future. You can buy interest rate caps, but they can be expensive. We have seen the cost of an interest rate cap increase 40 times from what it was at the start of the year for the same strike rate. So you either have repeat costs or the unknown around your borrowing costs.

We see some borrowers saying, “Now is a great time for fixed rate debt because I know what my cost is. I can lock it in and have that debt predictability over the next five or 10 years, depending on the length of the loan.

We are also seeing more borrowers opting for the five-year fixed rate rather than the 10-year fixed rate, and we have also launched a five-year fixed rate program. The idea behind this is that rates are significantly higher than they were a few years ago. If you choose five years, you have certainty for five years. But you get the benefit, if rates drop beyond that, that you haven’t necessarily locked in for 10.

I wonder how eager borrowers are to lock in rates right now because rates could stabilize next year.

Wheeler: In the short term, we are seeing a slight dip in activity as I think most borrowers are focused on trying to better understand where the Fed is going before making long term decisions. But that said, some borrowers are still buying assets or have debt maturities they need to settle, and we believe our five- and 10-year fixed rate debt products are good ways to meet those borrowing needs. .

Coming back to the market in general, the negative leverage for CMBS peaked during the third quarter. What impact does this have on demand from bond issuers and buyers?

Wheeler: What we are seeing is that this leads to lower leverage in the market. We are very focused on the debt service coverage ratio. What would have been a 70% hedged LTV loan last year might need to be 50 or 60% in today’s market to avoid some of that negative leverage. This has the effect of reducing leverage in the market. Some loans also need additional structure in the form of interest reserves or other structures to meet the current coupon situation. But it is certainly a priority for borrowers and bond buyers.

CMBS default rates have improved over the past two months, and I think that speaks to the strength of the underlying collateral. Could this change if we enter a recession or if values ​​start to suffer?

Wheeler: This is something we are monitoring closely. If you look at public REITs, revenue and, frankly, net income still looks very good for multi-family, industrial, and hotel properties. In the industrial and multi-family sector, we have experienced record rental growth over the past two years. It still led to very strong earnings, and it also benefited debt holders.

Office, where you saw a lack of demand and negative release gaps for many assets, is a bit of a different story. We expect you to see more delinquency in this area. Overall, however, the leverage on the CMBS market is much lower this time around than it was on the GFC. We believe this gives the loans a cushion to absorb what could be a downgrade in value. But, depending on the severity of a potential recession, you could see more stress in the sector, especially in offices.

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