How Commercial Real Estate Lending Is Changing Business
For a long time, commercial real estate lending has catered primarily to larger properties such as multifamily buildings with over 50 units. This has left a gap in the market with an underserved population of real estate investors. However, this may be changing as new trends emerge in the lending industry.
Faster and Clearer Data
One of the challenges of lending for smaller properties is that the fees are lower. Therefore, lenders can’t afford to invest as much time into making their decisions for individual properties. The choice seems to be to take on riskier loans, cut into profit margins or not lend for small buildings. Many lenders have tended towards the latter.
Fortunately, capturing data such as rent rolls is easier than ever. Lenders need to spend less time evaluating deals. The more efficient lenders can be, the smaller loans they can service while still maintaining profit margins.
Automation of Valuation
Lenders use models to help them determine the proper value for a given deal. This has historically been a manual process. Computers have helped to speed up the valuation process. However, until recently, there was still a significant need for human input.
Today, there are automated valuation models that can essentially preapprove deals. This means that lenders can prospect for deals more easily and in a greater volume. Again, efficiency is important for maintaining optimal profitability.
For smaller borrowers, this is good news as more deals are likely to be valued quickly. It also likely means that many commercial lenders will be casting a much wider net soon.
Greater Standardization of Underwriting
Underwriting is a surprisingly fragmented process. While some elements are similar between most lenders, many of the specifics are different. This lack of standardization makes deals slower and inhibits innovation. It is hard for vendors to make useful underwriting tools because the model used by each lender is different.
Machine learning and AI may have the answer. Computer applications that can learn and adapt to the user, data and results can be more efficiently customized to each lender. That means that underwriters can complete fewer forms and simplify their processes while still using a familiar financial model. This spells good news for alternative borrowers.
The Dawn of a New Day in Lending
Commercial real estate lending has long been hampered by inefficiencies. These have prevented lenders from working with smaller deals. The above changes in the industry suggest that a new day may be dawning for smaller borrowers.