CRE Continuing to Crowdsource

January 18, 2017

Commercial real estate developers in the market for loans are continuing to find the funds they need through marketplace lenders, giving traditional lenders a run for their money.

In 2013, federal law set the precedent by allowing businesses to publicly solicit investments from accredited investors. And, while the idea didn’t launch in commercial real estate immediately, there was rapid growth for marketplace lending platforms in 2015. According to the Office of the Comptroller of the Currency, crowdsourcing options originated nearly $30 billion in loans last year.

Now, the commercial real estate sector is turning to marketplace lending for greater efficiency and speed in terms of execution, along with previously untapped sources of capital. Because CRE loans are typically more document-intensive, larger loans that deal with varied collateral, marketplace lending growth will be moderate. However, these online platforms are gaining enough traction in the multi-trillion dollar U.S. CRE finance industry that bank regulators and rating agencies are sitting up and taking notice. In time, it is likely that crowdsourced funding will drive banks and other portfolio lenders to shift their origination process online and streamline execution, especially for smaller loans.

Marketplace lenders seem to be finding their niche funding CRE loans of less than $5 million – a range that overlaps CMBS loan originations and portfolio lenders. Some experts indicate this is proof of the need for non-bank and alternative lenders in the wake of the contracting and shifting CMBS market. One crowdsourcing entity, Money360, reported a 100% increase in applications from borrowers turned down by bank and CMBS institutions as a result of tightened regulations.

Even with these reports of growth in crowdsourced lending options, the evolution of the CRE marketplace bears watching. Marketplace lendings don’t have long performance track records to prove viability, and an element of negative selection could be in play as these lenders will often take on risks that balance-sheet lenders would not.

Time will tell as the banks and marketplace lenders each try to leverage different strengths to hold position in the CRE market. The professionals at Intelica Commercial Real Estate will continue to monitor the lending landscape for our clients and partners, providing analysis that informs smart real estate decisions.