State of the Industry: Commercial Real Estate in Marketplace Lending
[Editor’s note: This is a guest post from John Maute, Board Member at Money360. Money360 is a Gold Sponsor at LendIt USA 2016, which will take place on April 11-12, 2016, in San Francisco. At LendIt, John will be doing a presentation titled: Wall Street + Silicon Valley = The Next Gen of Commercial Real Estate Finance.]
Technology can dramatically change an industry. Take, for example, how the commercial real estate industry has conducted paper-based operations and worked through the same institutions – banks, insurance companies and Wall Street – for the past 100 years. Now, seeing the powerful influence of new technology-driven brands such as AirBnB, Zillow and Auction.com, which have propelled other industries to success, many commercial real estate executives have begun to consider how these technological advances can be applied to their industry to unlock untapped potential in a $3 trillion marketplace.
Traditionally, commercial real estate financers have been successful as a result of the information they hold and the distribution channels they create. Through a tightly controlled process, lending institutions receive deals from their broker networks and, once funded, sell those loans to investors via a variety of channels (e.g., CMBS, insurance companies, pension funds). Financial institutions receive fees as a result of this process, creating a solid and self-funding business model. However, as a result of the JOBS Act of 2011, which allows web-based investment platforms to advertise online to the general public, and the increasing adoption of marketplace lending and crowdfunding in other industries, the commercial real estate industry is looking to technology to bring additional capital and speed to the marketplace. The initial adoption of technology by commercial real estate finance players is breaking down barriers of old business models and opening the door for wide-spread acceptance.
Technology has the biggest opportunity to influence the traditional distribution systems of commercial real estate finance. Through marketplace lending and peer-to-peer platforms, companies in this space can source deals (both debt and equity) and match investment products to investors. Because the sourcing process happens in an online environment that reduces management fees, owners and investors may receive more attractive financial deals than they would through a traditional process.
While many commercial real estate finance professionals are exploring how integrating technology into their processes can improve deal flow, widen the investor base, and provide additional market stability, it does not mean that traditional lending practices are a thing of the past. In fact, many of the foundations of the paper-based processes are as appropriate today as they were 50 or 100 years ago. Having experienced underwriting analysts conduct detailed cash flow underwriting and thoroughly reviewing risk factors critical to creating quality loans – and these components must be fully integrated into any process powered by technology. In other words, there’s no app for human expertise.
As a large number of real estate loan maturities roll in over the next 18 to 24 months, the opportunity for growth in commercial real estate marketplace lending will continue to increase. Technology will be a key component in the industry’s ability to bring capital to the market to fund the loans, as well as its ability to process the deals. Just as was needed in the past with paper-based systems, the industry must identify best practices for technology-based systems like marketplace and peer-to-peer lending. Many marketplace lenders have already started to create these standards internally, and this trend will continue industry-wide. To build a sustainable and stable industry, leaders must work together to develop best practices, create regulations and keep out bad actors.
With increased regulations affecting traditional lenders, and consumers and companies continuing to look to technology to integrate and expedite processes, the marketplace lending industry has the opportunity to fill a void in the marketplace. As a result, the increased adoption of technology-powered practices will not only create significant opportunity for borrowers and investors, but will revolutionize the commercial real estate finance industry.
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