The real estate industry is hot, even with the long-term effects of COVID remaining to be seen. Commercial real estate, and especially multifamily, appears to actually be more liquid than in the past, hitting $32B in Q1 2021 alone, with record amounts of dry power targeting the sector. With that environment, expect some major changes in the industry as CRE stakeholders strive to close more quality deals involving the lowest risk. Here are our predictions for the 2nd half of 2021, and beyond, especially pertaining to the relationship of technology and real estate!
1. Shortage of Supply and Employees Drives Technological Efficiency
Both lenders and borrowers have strong appetites for commercial and multifamily mortgages, making debt liquidity “abundant,” according to a recent JLL report . With that said, multifamily supply actually continues to be a challenge especially across certain lower housing segments. This environment is ripe for both lenders and borrowers looking to accelerate their underwriting any way possible.
Combine that with the general labor crunch in the US, where there is a shortage of skilled and specialized workers. Analysts are harder than ever to come by. Technology will rapidly get a more prominent seat at the table, even in this industry known for it’s resistance to technological adoption.
Recent advances in automation, machine learning and especially AI (artificial intelligence) have created new opportunities to catch deals that would otherwise have been missed via traditional origination. Data tools have gotten incredibly good at bringing information forward, even about “that weird building across the street.” With the glut of data however, recent reports highlight that just 40% of CRE executives have figured out how to use automation for benchmarking, performance analysis and similar processes, and 60% are still using spreadsheets as their primary reporting tool! Expect deep tech adoption to exponentially become more mainstream.
2. Banks (in particular) seek to further diversify risk
There are two key challenges created in the wake of the COVID crisis that often go unnoticed. First, the risk of renewing or originating loans will go up if borrowers face greater financial difficulties. As a byproduct banks will be more cautious before issuing loans, decreasing the amount of available capital and rising the interest rate. Second, lenders will face higher competition with less borrowers among whom they could spread the risk confidently. This would require banks and lenders to make their capital more valuable to strong borrowers.
Expect them to become more creative in how they diversify risk and grow their portfolios. This could lead to collaboration in the banking and lending industry at large, but it could also mean that banks will be hesitant to take risks they would’ve taken in the past.
"Combine a strong appetite for commercial and multifamily mortgages, a shortage of multifamily supply, a labor crunch in the US where analysts few and far between, and a traditional industry, and you have the perfect environment for technology to step-in to drive speed and efficiency"
3. Lenders ramp in due diligence in new ways
There is a lot of real estate data out there. Costar, REIS, Cherre, Appfolio, Yardi, Skyline, and many more. While access to data is no longer a challenge, the process of aggregating it and making sense of it has only gotten harder. Expect technology to play a role in making sense of the data. Over the rest of the year, we may just see more accessible data focused on very niche areas of the market.
With the continued market momentum, expect companies to try and gain new insights out of their existing data sets.
4. Changes in Communication Between Parties
The traditional process of preparing and processing a CRE loan has typically looked like this: the originator makes the first call whether or not a loan application should be pursued. They’d then pass it on internally, where analysts compare it against their models to determine a fit. After a few back and forths, and the senior managers would to come to a final decision in a group meeting. COVID has seriously challenged that model. In-person communication, including those decision-making meetings, have moved to Zoom over the past year, and companies are divided whether or not to bring them back full-time in-person. This is creating a new corroboration.
Communicating with applicants has also evolved. There is more resistance than ever before to a handwritten rent-roll, and digitized files still require analysis and interpretation. Two people across an organization may read the same form or data in two different ways. Sound familiar? Expect the methods of communication to evolve across all the stakeholders in CRE. Expect deal-focused communication tools to continue growing in traction, with features that help drive analysis.
5. The Great Residential Shift
Initial reports during the corona period all indicated a major shift from dense cities and urban areas to more rural spread-out areas, and while a post corona world may bring some thunder back to cities, there are some clear trends. A recent PwC residential report , for example, highlighted a number of less-densely populated urban areas like Atlanta, Nashville, Indianapolis, Phoenix, and Salt Lake City as in-migration markets, while the major metropolises along the northeast corridor and the west coast are expected to remain out-migration markets, at least for the remainder of 2021.
While sharply accelerated by COVID, this trend is due to many diverse factors. Young professionals and empty nesters, both demographics that have historically opted for urban-living, will continue becoming a smaller percentage of the US population between now and 2030.
These are exciting times for the real estate industry, and we can expect the 2nd half of the year to be no less dramatic than the first half. With a bit of forward-thinking and a renewed focus on efficiency, the smartest CRE stakeholders can truly take advantage of the opportunities that lie ahead.