The Future of Commercial Real Estate Underwriting: Technology & Innovation

What is Commercial Real Estate Underwriting?

Commercial real estate (CRE) underwriting is the process of assessing the risk of a loan for a commercial real estate property. It’s a deep dive into the borrower’s creditworthiness, the property’s value, local market conditions, and cash flow to determine if a loan is viable. This is important for lenders so they can underwrite loans accurately, minimize risk, and offer fair interest rates.

CRE underwriting is key in the financial world and impacts how loans are structured, and terms are given to borrowers. For example, metrics like loan-to-value ratio, debt service coverage ratio, and net operating income help lenders determine if a borrower and property meet the financial criteria.

Recent technological advancements like AI-driven tools are changing the game. These tools simplify property evaluations, improve underwriting accuracy, and reduce time-consuming tasks, making CRE underwriting more efficient than ever.

In this article, we will cover how technology is changing underwriting, the factors you need to consider, and how Blooma can make a difference. 

Let’s dive straight into it!

Traditional CRE Underwriting Challenges

Wondering why traditional CRE is no longer the best option? Here are the main challenges you might encounter.

Subjectivity and Bias in Risk Assessment

Underwriting is based on an individual underwriter’s judgment, which can introduce subjectivity and bias. 

Factors like borrower creditworthiness, property value, and local market conditions may be evaluated differently by each underwriter, resulting in inconsistent outcomes and inaccuracies in risk assessment.

Manual Time-Consuming Processes

Traditional underwriting involves manual data collection and analysis. 

Tasks like reviewing loan applications, verifying borrower credit history, and analyzing property appraisals can take weeks to even months, slowing down the lending process and creating inefficiencies for lenders and borrowers alike.

Difficulty in Analyzing Large Data and Complex Relationships

Modern commercial real estate transactions produce massive amounts of data, from projected market rents to historical vacancy rates. 

Manually processing and the analysis of these datasets is time-consuming and limits the ability to identify subtle trends and patterns automatically that can impact decision-making.

Risk of Errors and Inconsistencies

Manual calculations and fragmented workflows increase the risk of errors like miscalculating the loan-to-value ratio or overlooking key property details like existing building conditions or tenant improvements. 

These mistakes can result in financial losses, mispriced loans, and reputational damage to lenders.

Key Factors Considered in CRE Underwriting

A good commercial real estate underwriting process that leverages CRE software looks at many factors to get a full picture of risk and return. These are what give lenders the information they need to make decisions on loan terms.

Borrower Creditworthiness

Lenders look at the borrower’s financials, credit history, and debt service coverage ratio (DSCR). These give them an idea of the borrower’s ability to pay back the loan and manage their other financial obligations.

Property Appraisal and Valuation

A full property appraisal looks at the commercial real estate property’s market value, condition, and potential future income. Comparable sales data, property condition, and projected market rents are key to determining fair loan rates and accurate valuations.

Market Analysis

Understanding the local market is key to underwriting. Elements like tenant demand, competition, vacancy rates, and local economic conditions help predict the property’s performance and long-term viability.

Lease Analysis

Lease terms and tenant quality give insight into a property’s cash flow stability. This includes looking at elements such as rent rolls, leases expiring soon, renewal probabilities and the in-place leases' financial health impact risk and decision-making.

The Role of AI and Machine Learning Technology

Artificial intelligence (AI) and machine learning (ML) are changing the commercial real estate lending process by making it faster, more accurate and data-driven. They solve old problems, creating a smarter way to underwrite.

This happens in the following ways:

• Automation of Data Entry and Analysis: AI automates data entry and speeds up data analysis, reducing time spent on manual tasks. Lenders can process more loan applications faster and with more accuracy.

• Improved Risk Assessment Through Predictive Modeling: Machine learning algorithms look at historical and current data to create predictive models, giving lenders a better view of risk. These models help them anticipate market changes, tenant behavior, and borrower creditworthiness.

• Identification of Hidden Patterns and Anomalies in Data: AI finds patterns and anomalies in big data that would be missed by manual review. This means a full analysis of things like building cash flow, lease expirations, and vacancy rates.

• Enhanced Consistency and Accuracy in Underwriting Decisions: AI minimizes subjectivity and bias, ensuring consistency in underwriting decisions. 

Overall, using automated processes and data-driven insights can result in more reliable evaluations of factors such as the loan-to-value ratio, net operating income, and projected market rents.

Benefits of Technology-Driven Underwriting

Technology in commercial real estate underwriting is a game changer for lenders, borrowers, and investors. By using automation and data analytics technology in underwriting, you can fix the inefficiencies of traditional underwriting and set the stage for faster decision-making.

• Faster Loan Processing Times: Technology automates the underwriting process by eliminating repetitive tasks like data entry, document review, and risk assessment. This means real estate loans can be processed much faster, so lenders can keep up with the pace of the market.

• Reduced Operational Costs: Automation reduces manual labor and errors, so there are cost savings throughout the underwriting lifecycle. By improving workflow, lenders can focus on more strategic initiatives.

• Increased Loan Approval Rates: Data-driven insights allow for a better assessment of borrower creditworthiness and property value. By identifying opportunities and mitigating risk, lenders can approve more loans while staying safe.

• Improved Portfolio Diversification: Advanced analytics allows lenders to analyze more markets, property types, and risk profiles. This means better decisions that increase diversification and reduce market volatility.

Blooma’s Approach to CRE Underwriting

As the commercial real estate industry changes, Blooma is redefining the underwriting process with new technology and data-driven solutions.

How so?

Blooma simplifies the complex and time-consuming parts of underwriting and provides benefits to lenders and investors in the following ways: 

• AI Risk Assessment: Blooma’s algorithms assess a broad range of risk factors, from borrower creditworthiness to property-specific risks.
• Real-Time Data: Get current market data, property metrics, and tenant information so underwriting decisions are up-to-date and relevant.
• Portfolio Risk Monitoring: Blooma tracks and analyzes risk across the entire portfolio so lenders can manage multiple investments.
• Data-Driven Insights: Blooma analyzes complex data to give lenders actionable insights to make underwriting decisions and optimize portfolio management.

Here are the benefits you can gain: 

• Faster and More Accurate Underwriting: Automation eliminates the need for manual tasks, so your workflows are faster and more precise.
• Better Portfolio Performance: Data-driven strategies increase portfolio performance by finding high-value opportunities and mitigating risk.
• Less Risk and More Compliance: Full risk assessment and real-time monitoring improve compliance and reduce market exposure.
• Data-Driven Decision-Making for Business Results: Blooma gives lenders the tools and insights to make tactical decisions that deliver long-term results.

The Future of CRE Underwriting with Blooma

Strong underwriting is the foundation of a good commercial real estate lending portfolio. 

As the industry changes, using technology and AI-driven solutions is key to being competitive, reducing risk, and increasing returns.

Blooma is leading the way in this change with tools that change the way lenders underwrite and manage their portfolios. From AI risk assessments to real-time data, Blooma allows lenders to make better, faster, more informed decisions.

Don’t get held back by old processes. Find out how Blooma’s technology can change your underwriting, optimize your portfolio and ensure long-term success.

Take the Next Step

• Visit our website to learn more about Blooma’s technology and solutions.
• Book a demo to see Blooma in action and see how it can change your CRE underwriting.
• Read our blog for insights, tips, and success stories on using technology in commercial real estate underwriting.

Commercial real estate underwriting has never been more future-proof – let Blooma show you the way to efficiency, accuracy, and success.