Non-Traditional Lenders Have Disrupted CRE Finance
In the past, generations of commercial real estate investors were able to depend on a measure of stability in CRE finance. Credit would tighten and loosen in accordance with the business cycle but developers and building owners generally knew where they stood. The economy was expected to grow at a respectable pace despite inevitable recessions. The demand for office buildings, retail outlets and apartment units was steady and the foundations of our system were considered sound.
The Rise of Non-Traditional Lenders
With the onset of the financial crisis issuance of Commercial Mortgage Backed Securities (CMBS) virtually ceased, a capital source that had been producing $20 billion dollars a month in CRE funding disappeared virtually overnight. At the same time — and while property valuations were plummeting — banks and insurance companies drastically tightened lending standards. Investors were desperate to refinance their struggling properties but traditional lenders like banks and insurance companies were simply not lending.
Non-traditional lenders stepped in to fill the breach. Private equity firms and hedge funds entered the CRE finance market with fresh ideas and innovative solutions that catered to the new reality. Wealthy individuals poured money into commercial mortgage pools (debt funds) which provided much-needed bridge lending. Mezzanine loans gained popularity and specialized firms were created to facilitate them.
The crisis has largely abated, Wall Street is issuing CMBS bonds again, the economy is humming along and the employment picture has (slowly, but surely) improved. However, many of the non-traditional providers have remained in the game and are now in direct competition with large, established banks. They're less regulated and more nimble than the old line institutions. They can create customized loans on the fly and alter deal terms at will. While the competition is good for investors, the banks and insurance companies are feeling the pinch.
These new capital options aren't going away. Traditional CRE finance institutions need to think of them as serious competition. Banks would do well to concentrate on what they do best and on what alternative lenders can't do — namely, large senior loans, CMBS financing and government agency loans. Equity financing is another area where conventional lenders have a distinct advantage.
In some cases, the private lender will have the upper hand. For instance, short-term, equity-based bridge lending is one loan type uniquely suited to the alternative lender — mezzanine finance is another.
Sometimes it might be best to partner with private lending sources rather than expend resources on small-scale deals. Some CRE professionals have established relationships with dependable private sources to provide a wider range of services to their clients.
Rapid advancements in technology can also be a disruptive influencer in the commercial real estate business. But technology can be beneficial to lenders and other real estate pros who stay informed and keep on the cutting edge. In a changing and highly competitive business environment, enhancing productivity with advanced tech tools is an intelligent strategy.
It's common for commercial real estate firms to collect data on spreadsheets, but old fashion spreadsheets are not conducive to the analysis of that data. Today, savvy bankers need to employ high-tech analytical tools. These complex programs use detailed algorithms to draw out useable intelligence from collected data. In this fast-moving, ever-changing environment, information analytics need to encompass all of the operations of an entire operation.
It's also recommended that commercial real estate finance companies embrace financial technology (fintech). The world is being switched to autopilot — cars will (very) soon be driving themselves and trucks (even sooner) will be delivering freight without truck drivers. Real estate pros need to adopt that same attitude wherever possible. For them, that means taking full advantage of fintech.
Here are a few areas where technology enhancements could help banks adapt and compete in a changing environment:
- Robotic Process Automation: Almost all aspects of documentation up to and including signatures can now be done via computers by using robotic process automation. It may sound like science fiction but it only means that a software "robot" completes those mundane, manual and recurring tasks that waste so much time when done by hand. We should also note that computers make work faster with fewer errors.
- Cognitive Analytics: It would be a mistake to think that robotic process automation is only good for tedious paperwork. The software of today and tomorrow can be enhanced with cognitive analytical capabilities. In other words, our computers can become smart computers.
Banks that take advantage of cutting-edge technology will make better, more informed decisions. Costs will be optimized and data management will be streamlined.
To discuss this topic, or for more expert insight on your next commercial real estate opportunity, contact your mortgage banker or relationship manager.