Navigating the CRE Crisis: How Lenders Can Adapt to Rising Underwriting Challenges

How will the commercial real estate sector survive 2025? With rising interest rates, property values down, and loan defaults rising, the CRE crisis is putting huge pressure on lenders and borrowers alike.

Office buildings are facing record-high vacancy rates, leading to reduced cash flow and financial distress. Additionally, outstanding CRE debt has reached concerning levels, resulting in significant losses for financial institutions and private equity firms.

In this article, we will review key underwriting challenges, strategies for mitigating risk, and how technology can streamline lending processes to help lenders navigate the CRE and financial crisis. We’ll also cover why you should partner with Blooma during these challenging times. 

Understanding the Core Underwriting Challenges

Underwriting commercial real estate involves understanding the ever-changing financial system.

As the CRE market conditions shift, lenders must reassess their approach to risk assessment, loan structuring, and regulatory compliance.

Interest Rate Volatility

With interest rates up, refinancing commercial real estate loans is much harder. 

Source: Reuters

Borrowers who took out loans from the banking system during low interest rates now face higher debt service costs and are under pressure to repay. 

The Federal Reserve’s rate hikes have resulted in a higher delinquency rate in the first quarter of the year, adding to the stress on the system.

Declining Property Values

Several macroeconomic factors, including high vacancy rates in office buildings, are driving down property values. 

Lower values affect loan-to-value (LTV) ratios, and lenders must reassess the risk of CRE loans. 

Many borrowers find themselves with negative equity, and foreclosures are more likely.

Increased Loan Defaults and Delinquencies

Delinquency rates on commercial mortgages have soared, especially in office loans and retail. 

As property owners struggle with lower revenue, lenders are more exposed to risk, and the need for more accurate risk assessment has never been greater.

Data Scarcity and Inaccuracy

Lenders rely on financial data for underwriting, but outdated or incomplete information can lead to miscalculations in risk assessment. The lack of a single source of truth makes the underwriting process harder and riskier.

Financial institutions are under the spotlight as regulators introduce more stringent compliance requirements for commercial lending. 

As delinquency rates and defaults rise, regulatory pressures grow as regulators crack down on loan terms, capital reserve, and risk mitigation strategies.

Strategies for Adapting to the CRE Crisis

As the CRE crisis unfolds, lenders must be proactive in mitigating risk and staying financially stable. 

A combination of advanced risk assessment tools, better portfolio management, and improved borrower communication will help institutions get through this.

Enhanced Risk Assessment

Lenders must stress test and use predictive analytics to get a better view of their financial health. 

Using AI-driven risk assessment models allows financial institutions to analyze vast amounts of data in real-time and identify potential problems before they escalate. 

By combining automated risk modeling with portfolio monitoring software, lenders can better gauge the probability of default and implement preventative measures.

Also, advanced risk assessment tools can segment loan portfolios by borrower risk profiles so lenders can tailor loan terms accordingly. This approach reduces exposure to high-risk borrowers while maintaining lending in sectors with more stable financial performance.

Proactive Portfolio Management

To reduce risk, lenders should implement early warning systems to monitor financial performance.

Continuous monitoring of commercial real estate loans ensures lenders can detect distress signals in time. Key indicators such as rising delinquency rates, falling property values, and borrower liquidity issues can be early signs of defaults.

A proactive approach also means restructuring loans when needed. By negotiating loan terms, extending repayment periods, or adjusting interest rates, lenders can improve the chances of successful loan repayment and avoid the costly process of foreclosure. 

Also, keeping open communication channels with borrowers encourages transparency and promotes better problem-solving.

Data-Driven Underwriting

Commercial real estate analysis software allows lenders to get live market insights and better underwriting decisions. 

Traditional underwriting methods rely on historical data and static reports, whereas modern AI-driven platforms provide dynamic financial insights. These platforms combine property valuation data, tenant occupancy trends, and broader macroeconomic factors to give a more complete risk profile for each loan.

Automated underwriting solutions also reduce the chances of human error in risk assessment. By streamlining data collection and analysis, lenders can process loan applications faster and reduce underwriting times. 

This ensures loans are structured correctly, balancing lender risk with borrower financial viability.

Strengthening Borrower Communication

Open communication with borrowers can help lenders implement loan restructuring before defaults occur. Establishing clear borrower-lender communication channels allows for the early identification of financial difficulties, and lenders can work with borrowers on feasible repayment solutions.

Proactively engaging with clients allows financial institutions to develop repayment plans and minimize forced sales. 

By offering temporary relief measures such as interest-only periods or payment deferments, lenders can support struggling borrowers while maintaining loan performance. 

Pro-Tip: Consider opting for financial literacy programs for borrowers on loan management. This can contribute to a more stable lending environment.

Diversification and Flexibility

Lenders should consider diversifying their portfolios by including alternative asset classes, such as multifamily loans and data centers, which have shown resilience amid the CRE crisis. 

Expanding beyond office buildings and retail properties allows lenders to spread risk and take advantage of asset classes that continue to generate strong returns.

Adjusting loan terms and structuring deals with greater flexibility can also mitigate potential losses. Offering tiered loan structures, interest rate adjustments, or revenue-sharing agreements can create a more balanced risk-reward scenario for lenders and borrowers. 

By incorporating flexible loan exit strategies, lenders can better adapt to shifting market conditions without significant financial setbacks.

Technology as a Solution: Streamlining Underwriting in a Crisis

In response to the CRE crisis, financial institutions are turning to technology to be more efficient and reduce risk.

Using AI underwriting software, lenders can automate manual processes, improve risk assessment, and overall compliance.

Advanced portfolio monitoring tools provide real-time insights so institutions can make data-driven lending decisions and proactively manage distressed loans.

Blooma’s Underwriting Software Empowers Lenders

Blooma’s AI-driven commercial real estate software is designed to help lenders navigate the complexities of today’s changing and risky market. 

By integrating automation, real-time data analysis, and risk assessment tools, Blooma enables businesses to:

• Automate underwriting and portfolio monitoring processes
• Gain comprehensive insights into loan risk and borrower financial health
• Reduce reliance on outdated data and manual calculations
• Make faster, more informed lending decisions for better growth

To learn more about how Blooma can help streamline your commercial lending operations, visit Blooma and explore our commercial lending software.

Get a demo now!