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!
Wondering why traditional CRE is no longer the best option? Here are the main challenges you might encounter.
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.
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.
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.
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.
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.
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.
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.
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 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.
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:
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.
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.
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:
Here are the benefits you can gain:
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.
Commercial real estate underwriting has never been more future-proof – let Blooma show you the way to efficiency, accuracy, and success.