When I first started working with national multifamily lenders (like the groups on this list), I was surprised how few of them made loans for apartments under 50 units. Since larger transaction volumes support larger fees, it makes sense that nearly all of the major real estate lenders cater to the top end of the market. In fact, based on the level of customized service they provide and the teams they need to provide this level of service, some have told us it's simply impossible to profitably underwrite loans for small properties — the fees just aren't large enough.
This segmentation among lenders has impacted the way technology has developed to serve the multifamily industry. Over the past 20 years, a strong data ecosystem has evolved around the 50-plus-unit market. Nearly all large property owners or managers use one of the few major property management software providers (Yardi, RealPage, Entrata, etc.), and there are myriad tools (CoStar, REIS, Axiometrics, etc.) to provide data for analysis. This means similar exports, consistent data feeds and, generally, a lot more standardization than you'd see with properties under 50 units. This data availability has allowed lenders even further cater to the top end of the market.
But with great transparency and access to data comes great competition. The largest brokers, lenders and owners are now competing for slimmer and slimmer margins at the top end of the market, and lenders in particular are becoming increasingly interested in capturing the small balance loan market to generate greater volume and profits. To underwrite profitably in this space requires minimizing human involvement. Creating a self-serve infrastructure for potential borrowers to submit documents and receive approvals with minimum turnaround time is the name of the game. And from what we’ve seen, lenders are investing heavily in startup companies to help build a competitive advantage in this arena.
Based on our conversations, here are three things that lenders are investing in that will fundamentally change the way the commercial real estate industry works:
This is a huge pain point for lenders — and brokers, and investors, etc. Anyone who's received a scanned rent roll that they had to transpose to Excel has dealt with poorly functioning OCR, monotonous copying and pasting, and manually checking every line several times. Within the next year, parsers will be available to process scanned rent rolls and T-12s with ease, freeing up thousands upon thousands of hours for overworked analysts. Lenders are working hard to make this a reality. As with all technology, this will give the industry more time to focus on customer service and finding new deals. And for lenders, the efficiency increases will help them write small balance loans much more profitably.
Standardizing the Underwriting Process
Real estate is extremely fragmented — perhaps because there are so many owners that one no one owner is dominating the commercial real estate market (compare to Google Chrome's 67% ownership of the browser market!). This has a huge impact on the ability to efficiently process transactions. In the next three to five years, lenders are going to either make everyone use a standardized template for underwriting deals, or use AI to create a "Rosetta Stone" for translating between different financial models.
I’m certainly betting on the latter. It’s hard to get people to change, and everyone trusts their own Excel model. With AI, however, people don’t need to change. The industry can keep doing what it’s doing, and have fewer forms and documents to fill out, as machine learning algorithms make all templates talk to each other.
Automated Valuation Models For Commercial Real Estate
This one is the holy grail. Before the end of 2018, the first automated valuation models for commercial real estate will very likely hit the market. Just as lenders use automated valuation models as a guideline in residential real estate (think Corelogic, Zillow, House Canary, etc.), they will start to adopt AVMs to “preapprove” commercial real estate deals. This will allow lenders and brokers to prospect for deals much more efficiently, evaluate loan portfolios instantly, and quickly distinguish between deals that can be underwritten automatically and those that require a deeper dive by underwriting teams. This will significantly increase lenders’ profitability, and substantially decrease the time it takes for everyone else to get a loan.
At the end of the day, the cutting-edge technologies (like Enodo!) that lenders are investing in today are going to make everyone’s lives a lot easier in commercial real estate. Keep that in mind the next time you’re responding to a document request from underwriting.