Modernizing Commercial Real Estate Lending
While numerous industries have grown agile from the digital revolution, commercial real estate lending is not one of them. On average, it still takes 3 months to close a commercial real estate loan. When a borrower finds an investment property and identifies their loan needs, their broker has to call individual banks in search of deals. Negotiation and due diligence takes months to unfold. By the time a deal is closed, it’s rare for both sides to get exactly the deal they wanted. This extended process also leaves lenders slow to react to changes in market demand and risk.
Commercial lenders’ slow adaptation of technology puts them at a disadvantage compared to residential lenders. Right now, the pandemic aftermath is driving a revolution in commercial real estate. Companies are rethinking how they use their office space in wake of a partially remote workforce. Stores are turning into mini warehouses thanks to curbside and delivery services the pandemic made popular.
If commercial lending doesn’t keep pace with commercial usage in rate of change, alternative lending platforms could cut banks out entirely. Crowdstreet already has over $1 billion invested on their platform, as does Fundrise. Banks cannot allow their reliance on outdated technology to cost them customers in a recovering market. As author Chris Skinner put it, “ignoring technological change in a financial system based upon technology is like a mouse starving to death because someone moved their cheese.”
Making commercial real estate more agile would look something like the following. Fintech lenders could process mortgage applications 20% if they did so digitally, all with no increase in defaults. First, lenders enter their criteria. At the same time, brokers enter loan details and borrower preferences. Both sides are expected to specify asset types, geographic regions/locations, and dollar amounts while brokers should additionally cover occupancy and sensitivities such as closing times, recourse, and rate. With numerous lenders and brokers in the system, advanced algorithms can then match people to deals of best fit.
After a match is made, both sides have all the information they need in one convenient place. Bidding and negotiating can move faster because deals are already matched to bank requirements. Should a lender have an appetite change, they can instantly update loan criteria. Regardless, they will only be shown deals that match their preferences. Everyone benefits from increased deal speed, safety, and soundness. Commercial lending’s future is here!
