Technology has been hailed as the solution to an ever-expanding range of business problems, with fintech now disrupting almost every sector of the financial services industry.
The commercial real estate (CRE) industry is no exception. Nearly every skyscraper, shopping mall and office property owes its existence to capital from a CRE lender. But just as several enterprising tech companies have disrupted the consumer lending market, tech-enabled alternative lenders are continuing to transform the CRE market. As the founder and CEO of a technology-enabled direct CRE lender, I’ve experienced firsthand how technology has impacted, and will continue to impact, commercial real estate. Over the past several years, alternative lenders — including tech-enabled direct lenders like us, non-bank lenders and marketplace lenders — have effectively leveraged technology to create a more efficient and streamlined CRE sale and financing process.
The evolution of the CRE market has revealed the many benefits of technology but also its shortcomings. While the financing process is faster, easier and more transparent, there are still some parts of CRE lending that are dependent on human interaction.
For years, the traditional process of securing a commercial real estate loan looked something like this:
• Borrower identifies a need for additional capital for a new or existing CRE project and then spends several weeks gathering financial details such as balance statements, projected cash flows and potential risks.
• Borrower completes a loan application and applies for a loan at a bank or alternative lender.
• If there is an alignment of interest regarding the project and terms, the lender begins its extensive due diligence process — which can take months.
• If approved, the borrower reviews the final loan terms and agrees to a specific payment schedule and proceeds toward closing.
• If declined, the borrower goes to another lender and repeats the process.
This process only became more complicated when financial regulations such as the Dodd-Frank Act and Basel III imposed stringent capital requirements on banks, impacting a potential source of funding for all but the largest and most creditworthy of borrowers. So instead of having the flexibility to review different loan offers, many smaller borrowers now found themselves forced to choose between a bad offer and no offer.
But thanks to technology, the CRE market is now booming.
Just as technology helped transform consumer lending through the rise of platforms like peer-to-peer platforms Lending Club and Prosper, technology is helping to simplify and speed up the commercial real estate lending and underwriting process. Instead of waiting weeks for a loan decision, borrowers using a tech-enabled direct lender can apply in just 10 minutes and receive a decision in as little as 24 to 48 hours.
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Technology can also be used to help speed up the due diligence and closing process. For example, in a partnership between my company, Money360 and Ten-X, an online real estate transaction marketplace, we agreed to use our technology to pre-underwrite CRE properties before they get posted on the Ten-X platform. This tacit guarantee of funding is a win-win for both lenders and sellers because it helps attract more buyers, and therefore more competitive bids, for the properties. The partnership also allows us to close bridge and permanent loans much faster.
The advantages of technology extend beyond just speed. Instead of hauling around hundreds of pages of documents, borrowers can complete their loan application digitally, reducing the potential for human error or missing information. Meanwhile, lenders can simplify the due diligence process by using sophisticated computer algorithms to efficiently parse through these documents and produce a summary that can then be reviewed by a CRE professional. These algorithms can comb through data at many times the speed of a human and, in some cases, automatically screen out unqualified applicants.
Why You Can’t Underwrite A CRE Loan With An Algorithm
But for all the benefits of technology, there are still some things a computer can’t do.
Within the CRE industry, one of the biggest challenges is how to properly underwrite a loan. There are so many factors that go into this decision — the quality of the borrower, the location of the property, the type of property, the potential cash flows from the property and, of course, the financial details of the loan. And none of these factors can be simply boiled down to a single number or term.
For example, consider a borrower in need of $10 million to build a doctor’s office in a suburban community with a fairly young population. Given these details, a computer algorithm may reasonably conclude that the business may struggle to attract many patients and may therefore either reject the loan application or propose a loan offer with unfavorable terms for the borrower. However, a CRE lender with decades of experience working one-on-one with borrowers will be able to take a closer look and see that the local population is rapidly aging, making a doctor’s office a potentially lucrative business idea.
This example highlights the need for a hybrid approach when it comes to CRE lending. To be sure, technology has played a big role in expanding access to capital for borrowers and has significantly streamlined each stage of the lending process. But technology is only as good as the humans using it. By combining the data generated by computer algorithms with the insights generated by experienced CRE professionals, tech-enabled lenders are better able to reach an optimal decision for both sides.
We are still in the early days of fintech in the CRE market. But as the technology improves, so too must the CRE professionals who are responsible for making the final lending and underwriting decisions. Computers will get smarter, but there will always be things they can’t accurately calculate. The CRE lenders who best take advantage of this information gap will be the ones to drive the industry forward.
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