How to Optimize Your Commercial Real Estate Portfolio in a Downturn

Construction Finance
6 MIN
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AUTHOR Built Team

In the face of an economic downturn, commercial real estate (CRE) lenders should prioritize optimizing their deal management processes to mitigate risk in their portfolios and maintain competitiveness. Lenders that aren’t investing the time and money into digital optimization will miss opportunities due to a lack of portfolio visibility and open the door to risk. However, it is important to first understand the current state of commercial real estate and how the economic headwinds are changing the deal management model. 

How is the current economy impacting the CRE deal landscape?

The current state of the commercial real estate deal landscape is a far cry from where it was a few years ago. Rising interest rates have fundamentally changed how lenders approach deals and their criteria for deploying capital. In the past, lenders had a wide range of deals to choose from and cash flow wasn’t a major concern. However, with rates continuing to rise, the era of “cheap money” is over and lenders are being more cautious in deploying capital–causing some to recalibrate how they analyze their portfolios. 

The commercial real estate deal model is shifting from a state of originating and closing every deal as fast as possible to a stronger focus on surveillance and asset management to mitigate risk on existing deals. Cash traps are triggering, covenants are being breached, and lenders are not able to price out the replacement capital–forcing a much greater focus on post-closing and individual deal metrics that may have been overlooked in a healthier market. There is no question that the uncertain economic climate has created a state of elevated risk–as evidenced by the near record-high default rates on leveraged loans

Another impact of rising interest rates is an increase in bridge loan acquisitions versus ground-up construction loans. However, even bridge loans that may have started as ground-up are becoming increasingly difficult to do, as project timelines continue to slow. The credit pool has all but dried up and lenders are being more conservative with how they’re deploying capital and which deals they’re following through with. It has become a waiting game to see what the true implications of rising interest rates are for the current economy–resulting in trepidation to tackle larger ground-up deals. 

How are economic headwinds shaping the way CRE lenders do business?

The shift from a sales-based approach to a risk mitigation model means fewer deal originations and less money coming in the door. Lenders need to rethink how they’re spending money on resources–primarily technology. The slowdown in deals presents an opportunity for lenders to take a step back, reassess legacy processes, and implement technology that mitigates risk during the downturn and propels the business forward when deal activity picks back up. 

Historically, deal management workflows haven’t been optimized for economic turbulence. While manual Excel-based solutions may have sufficed in the past when the market was strong and asset-level surveillance was the primary focus, they are inadequate for portfolio-level monitoring in times of uncertainty. Pulling and analyzing disparate information from multiple spreadsheets and asset managers is incredibly difficult. By using siloed Excel models, lenders expose themselves to risk by not being able to aggregate and analyze their portfolios by location, asset type, origination date, loan lifecycle, or IRR. As firms become increasingly aware of the mounting risks resulting from the current macroeconomic environment, many should consider investing in technologies that provide a holistic view of their portfolios and allow for more efficient risk management.

How can CRE lenders modernize their portfolios in a downturn & beyond?

Commercial real estate lenders are continually looking for new and creative ways to make deals–which has allowed a near infinitely configurable tool like Excel to persist. Lenders require access to high-quality data to make smart investment decisions, which is where Excel shines. However, if that data can’t be easily input into the system for further analysis, it is essentially useless. While deal management systems can perform all the necessary calculations, the real challenge is getting the data in the system for analysis and risk mitigation.

Built has created the first truly user-friendly deal management application that doesn’t set you back in time. By leveraging a best-in-class integration with the Microsoft Office Suite, you can work seamlessly in your current underwriting and pipeline workflows without having to change your team’s processes. Built’s Deal Management platform enables you to pull all data from your Excel-based modeling, servicing systems, or market data sources and upload it to the cloud with the click of a button. Once that data is in the system, you can use it to analyze construction budgets, complete asset portfolio reviews, pull quarterly asset summary reports, segment IRR metrics, and review recently updated market dynamics. Built provides true visibility and risk mitigation over your entire portfolio with unmatched collaboration, dashboarding, and insights–all with a few clicks.

Ready to get started? Our team is eager to discuss how we can meet the evolving needs of your commercial real estate investment portfolio. Schedule a free demo today.

Topics: CONSTRUCTION FINANCE | CRE