In 2019, 43% of US banks still used COBOL, a programming language created before the internet, to carry out important tasks. Banking tech is behind the times, and in few places is that more obvious than commercial real estate lending. On average, it takes 3 months to close a commercial real estate loan. First, a borrower has to find an investment property and identify their loan needs. Then, a broker sources a loan on their behalf by calling individual banks and inquiring about their deals. After that, the lender must decide if their interests align with the broker and begin months-long due diligence. If approved, the borrower may accept the loan terms and proceed to closing. If denied, the process starts over with another lender. After months of negotiation, it’s rare to get the exact deal either side wanted. And as 2020 has proven, 3 months can bring a lot of change to the commercial real estate market. Those slow to adapt suffer the most.
At its worst point, 20% of retail spaces sat vacant. Office spaces languished not far behind with a 17% vacancy. Thankfully, the future is bright for commercial real estate. In 2021, commercial and multifamily lending will grow by 11%, reaching $486 billion. While offices and retail centers are engaged in a reimagining process, data centers and industrial sites are benefitting from the new normal. Remote work and e-commerce have changed how people use office buildings and stores alike. Meanwhile, cloud and networking service demand has reached a high point, causing data centers to proliferate. The upward trajectory of e-commerce continues to drive demand for distribution sites, logistics warehouses, and storage spaces.
Market changes don’t mean everything is different now. Lenders still want deals with strong, long term value above all. However, the way lenders define a quality property investment will look different in 2021 and beyond. Unless their lending process keeps pace with market changes, traditional commercial lenders could be left in the dust. Manual processes slow down the lending cycle, wasting valuable time on everyone’s part. At the same time, tech savvy newcomers like Crowdstreet and Fundrise have gathered over $1 billion each in investments. Unless banks learn to compete, such platforms are poised to take over the market. “Reluctance to adopt new technology can stand in the way of innovation, and this, in turn, can lead to unintentional and potentially hazardous forms of disruption,” the Forbes Real Estate Council warns.
Compare commercial real estate lenders to their residential counterparts. Despite everything that 2020 threw at residential mortgage lenders, they rose to the challenge like a champ by using technology. 43% of borrowers were able to complete their applications entirely online while 74% used an online portal to work out details with their lender. Residential lending is leading the way. If they choose to, commercial lending can be like them.
That’s where advanced technology comes in to offer an agile advantage for commercial real estate. Fintech lenders process mortgage applications 20% faster with no increase in defaults. In their system, lenders and brokers each enter their criteria and preferences in one application. Once that is complete, advanced algorithms match brokers and lenders to their perfect-fit deals.
This sorting machine has benefits for everyone. Key information like asset type, dollar amounts, occupancy, and location are all in one convenient place, meaning lenders don’t waste time hunting down additional information. Furthermore, lenders can instantly update loan criteria as appetite changes, and they only see deals matching their preferences. Deals are already matched to bank requirements, so the digital bidding and negotiating process is significantly streamlined.