How better data sources create opportunities in CRE lending

The recent explosion of data resources and information about markets and customers has changed how companies do business, especially within commercial real estate.

"Real estate has been a pretty antiquated industry relative to data," said Jonathan Pratt, senior vice president of agency finance for Capital One. "Investors and lenders have made $100 [million] or $200 million investment decisions based on gut feelings and anecdotes. What we really need in commercial real estate is people making decisions based on data rather than intuition."

For Capital One, data has informed the company's introduction of new CRE lending products and expansion into new geographic markets and sectors. It's also led to greater advisory capabilities to target profitable offerings for clients' real estate investment.

"The openness of data makes it easier for lenders to look more broadly and quickly to get into new markets and asset types," said Yousef Master, vice president of business analysis for Capital One. "It's also changing the way we execute credit processes and get funding out to customers. That's only going to accelerate, because it's now possible to make decisions faster and be more responsive to the market thanks to the availability of that data."

Data indicating changing consumer behavior and market needs recently drove Capital One to expand its balance sheet lending product list to include manufactured housing. This expansion builds on the success of its agency finance business, which has closed more than 120 manufactured housing transactions since 2020, totaling nearly $1.1 billion.

More detailed and targeted data has also led to the bank's expanding its geographic footprint, as Capital One's commercial real estate group will be growing its teams in markets such as Boston, Chicago, Dallas and Denver. This expansion comes with plans to greatly accelerate hiring and transaction activity in these areas.

One improvement in data processing that has helped usher in these changes is the increased speed of data reporting in commercial real estate. Much of the data required by the industry had traditionally come with a lag of six months or longer, leading analysts to grapple with "new" trends just as those trends were fading or already in the past. As the speed of data reporting continues to increase, optimized sharing capabilities will allow commercial real estate companies to make more actionable decisions.

"Right now, applying for a loan at most traditional lenders may require transferring data from digital to paper, then reinterpreting it back into digital, and so on," said Master. "There are changes coming that will make it much easier to go directly from data source to data source. Then, the speed of decision-making can accelerate at a completely different pace."

Accordingly, the increased availability of data has also boosted Capital One's ability to advise its clients on potential commercial real estate investments, taking proactive measures to research specific recommendations as opposed to functioning reactively.

"My team combs through various large data sets and looks for value in the market with specific clients in mind," said Pratt. "If we have a family office that tends to be a long-term holder and is looking to outperform in Class A, we can tell them where the demographic trends are strong and where the cap rates stand. We go to our clients with that full equity strategy in hand and say, 'Based on what we know about your equity, your returns and your goals, we think these three markets meet your strategy, and here's all the underlying data to support that thesis.' We're steering our clients toward increased value by handing them a full deck that they can drop into their investment committee memos and integrate into their business strategy."

And in the future, the industry can expect greater innovations from the mix of proprietary and third-party data.

"Most of the industry is trying to collect all the publicly available third-party data possible and put it into one system," said Pratt. "Moving forward, proprietary data will likely be the next big industry game changer, where companies can generate their own data on a large, statistically significant scale to identify insights across the nation."

These are just some of the opportunities available to lenders who make the most of the data the CRE industry now has access to.

"We're getting to a place of automating numerous analyses throughout the industry," said Master. "With automation, we can dramatically lower the cost of looking at an opportunity, bump up the throughput so that we can look at many more opportunities, and really have a broader set of options to consider. That's going to change the experience that we, as a lender, are able to provide to the industry. It will also provide an opportunity to owners. If they can multiply the number of potential opportunities they're looking at tenfold, they're much more likely to find an opportunity that has an attractive return."

Read more on CRE Financing.