When we consider the various industries disruptive to today’s economy, we usually think about how Uber completely changed the game in terms of taxis and black car service as well as how AirBnb has transformed hotels, beds, and more. Changed the way we think about breakfast and hospitality. industry. Financial markets have been disrupted by innovations such as Stripe and Robinhood.
Commercial real estate lending: the need for an upgrade
Industry disruptors have moved into unsuspecting industries, only to effectively change the game for their respective market and, in fact, level the playing field. That said, not all industries have felt the disruption yet…
One industry that still lags behind these standards is the commercial real estate lending market – a market that has been lagging behind in terms of technological innovation.
Case in point: As recently as 2 years ago, more than 40% of US banks relied on COBOL, a pre-Internet programming language, for essential functions.
What if Commercial Real Estate Lending will not be upgraded?
Simply put, banking technology has not reached the modern era. In commercial real estate lending, this fact is painfully obvious. Even today, the lending process for commercial real estate relies heavily on brokers calling individual banks in search of deals. Negotiation times are long, stretching the average commercial real estate loan to a 3-month process. This is a problem because months of negotiations rarely result in the exact deal a lender wants. Commercial borrowers have to wait weeks or months for a loan decision, and lenders are slow to react to changes in market demand and risk. As this past year has demonstrated, a lot can change in 3 months.
Challenges facing commercial real estate in the time of covid pandemic
As the economy turned around in 2020, commercial real estate faced new challenges. At its lowest point, office spaces had a 20% vacancy rate, with retail spaces not far behind. Today, 33% of Americans work from home full time while 59% of retailers are concerned about rising rent costs. Both the office and the store are going through a re-imagining process to determine how they will use their space going forward. At this time, many stores are operating as mini-warehouses for curbside and delivery services.
Modernization of Commercial Real Estate Lending
Yet while some types of commercial real estate struggle, others are thriving. Commercial and multi-family lending will increase by 11% in 2021, reaching a total of $486 billion. The shift to remote work has skyrocketed the demand for cloud and networking services, making data centers a valuable asset. Meanwhile, industrial locations such as distribution sites, logistics warehouses and warehousing spaces are benefiting immensely from the shift to e-commerce. So while lenders still want deals of long-term value, the way they go about defining a quality property investment will look quite different in 2021 and beyond. It is only by adopting modern technology that commercial lenders can take full advantage of the changes in the market.
Compare the position of commercial lending with that of residential loan. Both faced major turmoil in 2020, but could barely beat the residential mortgage lenders. 92% of residential borrowers started their search for a lender online. In 2015, only 20% of lenders trusted websites. Additionally, 74% were able to use an online portal to work with their lender. For 43% of people, the full application can be completed online. These percentages are only increasing.
stay ahead of the change curve
A quote from Jack Welch, former chairman and CEO of General Electric, ” If the rate of change on the outside is greater than the rate of change on the inside, then the end is in sight” This means that businesses will soon find themselves in trouble if they do not stay ahead of the curve of change. Welch tells all industries through his quote that the problem isn’t focused on the rate of change, which is accelerating all the time, but what it does to customer expectations..
If commercial lenders want to connect with their friends in the residential part of the house, they need to work on it. Otherwise, the market has the potential to outperform them. Digital mortgage players are on the rise, and more than 25% of loans are direct-to-consumer origin.
Nowadays, most borrowers demand exceptional customer service as much as they want a great rate. If banks do not rise to the occasion, alternative lending platforms threaten to kick them out of the market. CrowdStreet has invested $1.25 billion on its platform, with Fundrise not far behind at $1 billion. As members of the Forbes Real Estate Council are quick to warn, “Reluctance to adopt new technology can stand in the way of innovation, and this, in turn, can lead to unintentional and potentially dangerous forms of disruption.” Is.”
Banks that need help over time can turn to more agile technologies. Such innovative technology provides agility; Fintech lenders process mortgage applications 20% faster with no increase in defaults. In short, the system here is a giant sorting machine. Lenders enter their criteria regarding asset types, geographic areas and dollar amounts on one hand.
At the same time, the broker on the other end records the loan details and borrower’s preferences regarding cost, property type, location, occupancy, and more. With enough of both in the system, advanced algorithms can match brokers and lenders to their right fit deals.
Both sides will benefit from the new arrangement.
The convenience and availability of information streamlines the bidding and negotiation processes, allowing lenders and brokers to invest their time and effort. There’s no need for lenders to chase down missing information, and deals already match the bank’s requirements. It brings increased deal speed and security to all.
In today’s uncertain times of the pandemic, there is no time to waste as commercial real estate is at a critical juncture of potential vulnerability. Lenders should be able to match with potential buyers in a more agile way and not miss deals that happen in their own backyard.
Learn more about agility and innovation in the realm of the commercial real estate lending market in the visual deep dive below:
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Author: Brian Wallace
Brian Wallace is the founder and president of Nowsourcing, an industry-leading infographic design agency based in Louisville, KY and Cincinnati, OH, that works with companies ranging from startups to the Fortune 500. Brian also runs #LinkedInLocal events nationwide, and hosts the Next Action podcast. Brian has been named a Google Small Business Advisor for 2016–present and joined the SXSW Advisory Board in 2019.