In January 1983, John Whitehead, then the co-chairman of Goldman-Sachs & Company, was puzzled over the lack of progress in his firm's real estate business, recalls Martin Bucksbaum, one of the country's major shopping center developers. "He asked me to stop by and discuss why nothing was really happening," said Mr. Bucksbaum, who urged Mr. Whitehead to be patient. Success came before even Mr. Bucksbaum had expected. That very year, Goldman's volume of commercial property sales and mortgage financing hit $2 billion, more than twice any previous year. And last year it surged to $4 billion. Indeed, for a firm. known most of all for the strength of its corporate investment banking activities and its clout in trading stocks and bonds for institutional clients, Goldman's emergence as a powerhouse in real estate investment banking has taken much of Wall Street by surprise. Even at Goldman, Sachs, which earned well over $300 million last year, the contribution of the relatively small real estate department has taken on a growing importance. The firm declined to reveal details, but based on fees that typically range from I percent to 21/2 percent of a deal's size, it took in an estimated $40 million to $90 million in revenues last year. So impressed was Goldman's chair-man, John Weinberg, that he pointed to the record volume of real estate transactions as the first of many "highlights of the year" in the firm's 1984 annual review, Goldman was not the first Wall Street firm to discover real estate. Morgan Stanley & Company acquired the highly regarded Brooks Harvey & Company real estate operation more than a dozen years ago, and recently Salomon Brothers and the First Boston Corporation have been putting together giant deals. As Sylvan Cohen, chairman of the Pennsylvania Real Estate Investment Trust, said, "The entire investment banking community has tried to get its two feet into real estate in recent years."
Goldman Emerges As a Powerhouse When it comes to arranging the sale of major commercial properties, however, Goldman is far and away the biggest factor, claims Sheldon Seevak, partner in charge of its real estate operations. "We don't think anyone is close to us," he boasted. Sale of Its Own Headquarters Since January, Goldman's deals have included the $35 million mortgage financing of the Ritz Carlton Hotel in Manhattan and the $400 million sale of the land under Rockefeller Center. And, last Tuesday, Goldman completed the sale of its own two year-old Wall Street headquarters to the Metropolitan Life Insurance Company for $310 million. To be sure, the boom in real estate may not continue indefinitely. Not only has the sIowdown in inflation reduced the incentive for institutional investors to own real estate, but proposed changes in the tax law and the glut of office space in many markets could also drive away investors and depress prices, say real estate experts. " I wouldn't touch real estate with a stick," said John Rutledge, chairman of the Claremont Economics Institute. He added that "pension funds are seeing what they are missing after being beat over the head by the rally in the bond market." Behind much of the business that Goldman has captured has been the demand for equity participation created by corporate pension funds looking to diversify their holdings. Attracted by the rapidly rising prices of real estate in the 1970's, they have been steadily increasing their holdings since 1978, when the amount of real estate in their portfolios was less than $5 billion. Now, it is estimated that they have about $40 billion, out of a total of about $1.3 trillion in assets. 'They Have the Contacts' Goldman's real estate star has risen in large part because of its penetration of the institutional marketplace and the blanket coverage its investment banking division gives to the corporate world. "They have the contacts, and they know which investors will play in which transactions so that you quickly get a reading," said Edwin Morris, executive vice president of the Bank of Boston, which used Goldman for the $363 million sale of its headquarters last year. Institutional investors also cite the firm's research and analytical expertise in the real estate field and the savvy of Claude Ballard, a Goldman partner, as giving the firm a leg up on its competitors. Mr. Ballard joined Goldman four years ago after managing the Prudential Insurance Company's equity real estate portfolio. "Very few deals come from Claude and his people that are not workable," said Raymond Morgan, a second vice president in the real estate department of the Travelers Insurance Company. Gordon Claggett, executive vice president of the real estate group of the Equitable Life Assurance Society of the United States, also credits Goldman with being "quick to adjust to market changes." With inflation low, for instance, the firm now recognizes that many institutional investors are returning to mortgage lending as well as continuing to purchase properties outright, he said. Less of a Force in Financing But Goldman is less of a force in mortgage financing, where other firms, such as the Brooks Harvey division of Morgan Stanley and the Sonnenblick-Goldman Corporation, are more active. What is more, Goldman has been late in latching on to the next big growth area in commercial real estate - securitization of assets. Salomon Brothers has led the way in creating marketable securities out of commercial mortgages and in finding new ways to package the sale of commercial properties in the form of a real estate investment trust. Goldman is rushing to catch up. One partner, Kenneth Brody, was brought over from the corporate investment banking department last year to lead Goldman into the field. And recently the firm hired Thomas Healey, a former Assistant Treasury Secretary, to work with him. Goldman started its real estate department under Mr. Seevak in 1975 when it realized that it could raise capital cheaply for corporate clients, including many of the large retailers such as Dayton-Hudson and Associated Dry Goods, by arranging mortgage financing on their stores. "With interest rates shooting up, corporate rates had moved ahead of mortgage rates," recalled Mr. Seevak. Its Clientele's Merchandise When pension funds and insurance companies sought more equity ownership in real estate as a hedge against inflation, Goldman turned to its corporate clientele and others for merchandise. It pointed out to them that selling their buildings and leasing them back was a cheaper way of raising capital than going to the marketplace with a new stock or bond issue. In recent years, Goldman has arranged the sale of headquarters buildings for many of the country's major banks, ranging from Mellon and Crocker to Bank of Boston and Security Pacific. Similarly, it has sold a number of corporate or division headquarters for the likes of Xerox, Owens-Illinois and USF&G. Mr. Seevak credits Mr. Whitehead, who recently retired from the firm and has been designated to be Under Secretary of State, and Mr. Weinberg with seeing the potential for real estate investment banking before many other large Wall Street firms. Mr. Seevak now has more than 50 professionals in his group, and he believes Goldman has the flexibility to adapt to changes in the tax laws and the economy. And, because most pension funds have a long way to go before they reach their stated goals of investing 10 percent to 15 percent of their assets in commercial properties, he said, "real estate is where the corporate markets for stocks and bonds were 20 years ago.
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