Real Estate Underwriting is Changing By Necessity

Tim Milazzo
October 31, 2018

Each of the above companies have put their hat in the ring to change the way commercial real estate investors look at their investment opportunities. Some of them provide data that helps inform investment assumptions. Some are the underwriting engine itself. Each would like to be a primary part of the underwriting process in some way. If even a fraction of these companies achieve their end vision, commercial real estate investment may change dramatically over the next decade and beyond.

This is not going to be a blog post analyzing the four categories I’ve bucketed start-ups into above. Instead, I want to take a look at why the ecosystem for underwriting methodology is changing, and how these trends will alter the industry. I believe that commercial real estate is both being pushed and pulled into the future of underwriting, and that that future is exciting.

How underwriting is changing

Less manual work

Opening up an Excel file and describing a commercial real estate investment from scratch takes a lot of work. There’s a lot of structuring before ever getting to enter data — which is also manual.

Underwriting tech is addressing this. Less clicks, less typing, less work to get to the end product, so an analyst can focus on projections, rather than models.

Greater velocity of deals analyzed

With more time focused on the output rather than math, one underwriter can work through more potential deals than before. This is important because, as we’ll see below, there are more potential deals to analyze than at any point in the past.

Greater accuracy?

For lesser experienced deal underwriters, the act of using a legitimate model built into modern software can be an accuracy boost itself. For professionals, it’s the act of analyzing a wider array of deals that can better form assumptions, and harness more market data at once that promises to boost the accuracy of deal analysis, which for some is the ultimate goal. If an investor can better gauge the potential future value of a property than the competition, they’ll make more money investing over time by picking more winners.

Factors driving underwriting software forward

Push factors

Push factors come from within the industry, spurring technology forward out of the needs of its participants.

  • Data availability up — there’s no doubt that more data points are readily available. Those include raw property information, market demographics, sales comps, and lease comps. Those also include lesser utilized data points that may not traditionally be considered commercial real estate data, but have a profound impact on the future value of properties and cities.
  • Opportunities disbursed more widely — log on to Loopnet. Now to CREXi. Then Ten-X. Then open up your email and open all the emails you have from brokers advertising their deals. Each of those deals is analyzed by many different equity investors. By their LPs. By lenders. How many deals should you want to analyze if the goal is to achieve superior returns? All of them. But you won’t, because you can’t, there are too many to analyze. This need is pushing the industry to innovate.

Pull factors

Pull factors come from outside the industry. The presence of new technologies and business paradigms create a “gap” within the industry that can be filled by platforms looking to take advantage by leveraging varied innovations.

  • Cloud computing & software — bringing data and software to the cloud (and off of someone’s physical device) is something that just makes sense in almost every business context. We live in a world where people have multiple devices, many of them mobile, and sharing information in real time is the norm. Bringing your business software to the cloud is one of the obvious ones.
  • Data science & machine learning — lots of people writing about this topic and what it means for the future of the industry. AI will one day be at the very center of real estate investing, but for now, expect to see machine learning and data science picking off more tactical problems related to making use of large data sets.

Consequences of lagging behind

Some industry players (investors, brokers, lenders, etc) are better positioned to take advantage of these tectonic shifts in the industry, and some are more willing. What will happen to those who are unable or unwilling to keep up?

Well, their competitors will get better visibility into the universe of available deals, price deals more effectively, and execute on opportunities more quickly. No big deal!

Let’s hear from the startups

At the helm of a startup innovating in this space? This was a high level musing — I want to hear more specifics about how you are changing the real estate underwriting game! I invite every startup in the space to chime in with a response. Bring something fresh that I haven’t exposed here, go deeper into one of the themes, or go against the grain of this framework. Don’t simply pitch your product, but please do enlighten us!

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