By Ira Zlotowitz, founder and president, Eastern Union Funding
The Commercial Real Estate (CRE) industry boldly leads the way in transforming the landscape of cities and communities everywhere.
Yet, it is one of the last industries to solidly embrace the broad adoption of tech-centric data access, instantaneous communication techniques, and mobile app technologies.
This flies in the face of logic because the convergence of mobile computing, big data and analytics, dedicated software and web services, cloud computing and social media has created an enormous opportunity to greatly enhance efficiency and growth for the CRE industry.
The advent of the smart-phone was the finishing touch, literally giving instant access to a wealth of critical information in the palm of one’s hand.
It empowers participants across the entire CRE spectrum and effectively levels the playing field.
CRE industry leaders, by and large, are finally beginning to utilize some of the integrated technologies that can transform a wide range of functions from decision and deal making, to tenant recruiting and retention, to pricing, selling, leasing, financing, constructing, and acquiring properties — but there is still a long way to go.
At present, some competitive forces are gathering strength by taking advantage of the full spectrum of information available.
For example, tech savvy owners identify office leasing, financing, and building buying opportunities by using big data services such as ACRIS, PropertyShark, CompStak, Actovia, Reonomy and CoStar.
When used properly, big data and analytics provide tech-enabled owners, building managers, lenders, as well as leasing, financing and sales brokers, a competitive edge over those balking at adopting the new technologies.
Today’s commercial tenants can drive the leasing process because they come prepared with detailed information about what other tenants are paying in that building and in adjoining properties. Similarly, borrowers have greater access to knowledge about rates and terms.
In the sales arena, those with the most up-to-date data and news are either buying or selling with greater insight into a property’s current market value.
Now that so much relevant data is readily available, owners of aggressive firms are pushing their staff and brokers for more intel to gain an even greater edge.
In addition, the online CRE news media is also influencing the industry in new ways. Journalists, columnists, and editors are connected to influential industry insiders who readily share proprietary information.
Often, participants in a building purchase, financing transaction or leasing deal are startled to see news about their agreement posted on CRE media websites less than an hour after a contract is signed or a lease, purchase or refinance closes.
Simultaneously, it is being tweeted to thousands of people in the industry.
Next generation data firms are using highly sophisticated systems to mine data and generate detailed information about a single property or an entire market.
For example, the New York City-based start-up Reonomy, which was launched in 2013, takes data-gathering and analytics to a whole new level. According to a report in The Real Deal, Reonomy combs 200 public databases and gathers a wide range of data about properties and “…then uses data science, machine learning and real hard-core technology to provide information clients want and can use immediately.”
What, then, is happening to CRE firms that are slow to embrace advanced technology and hesitant to adapt to the new approaches that others are using to service their clients?
Let’s look at one sector of the CRE industry – commercial mortgage brokerage firms.
Many of the leading brokers still rely on proven, although dated, methods to secure financing for their clients and charge steep fees to do so.
Traditionally, the best commercial mortgage brokers were the repository of all the latest information related to loans.
A good broker knew which banks were the most active lenders, and what the landscape looked like in terms of securing the best interest rate, terms and maximum proceeds. They were able to leverage their market knowledge to get the absolute best deal and then shepherd it through the closing process.
For their efforts, commercial mortgage brokers earned a commission of one percent of the full loan amount. For a $10 million loan, the broker would receive a $100,000 fee when the deal closed.
However, more borrowers are now informing their brokers that for larger loans, the fee of one percent of the full loan value often eclipses even the substantial savings negotiated on term sheets, due to the information and power their own firms are now capable of accessing. This, owners feel, is especially true for loans of $15 million or more.
So while borrowers still see a mortgage broker’s value, when the fees for large stabilized deals start getting into the hundreds of thousands of dollars, more and more borrowers go direct with the help of their attorneys.
Historically, in fact, on a nationwide basis 70 percent of borrowers have been going direct for stabilized transactions north of $25 million. What the market is saying, in no uncertain terms, is that with the playing field now leveled, it no longer works for a broker’s fee to only be calculated as a percentage of the loan amount on deals above $25 million.
Between a broker’s relationships and the streamlined processes of developing and packaging loan applications and term sheets that are available to brokers who know how to take advantage of them, the conventional fees for stabilized deals simply don’t longer make sense.
Commercial mortgage brokers need to innovate to protect their market share and adjust to changes in the marketplace.
The slow embracing of technological innovation with respect to the human facilitation of transactions has already started triggering an adjustment of pricing formulas in the industry and finding that “perfect blend” is representing a win-win for borrowers and brokers alike.
Industry research clearly shows that the largest mortgage firms are now beginning to heavily negotiate fees that top out at $135,000 — for all stabilized deals.
In fact, at the most active firm in the nation, fewer than eight percent of clients are paying over $135,000. Another prominent New York City boutique firm, averages less than $135,000 in fees per deal. This means that the industry, in response to consolidation, negotiation, technology, data, etc., is already implementing an unacknowledged fee cap of $135,000 – seemingly that “perfect blend”.
And this perfect blend is actually slowly reversing the trend and is attracting the borrowers with much larger deals. In fact, the 70 percent that have been going direct are once again considering using a broker, because the perfect value-added blend is back in line and going with a broker makes good business sense.
Importantly, only when a transaction is stabilized does the efficiency that technology provides kick in.
In sharp contrast, highly structured deals, construction loans, deals that require multiple lenders on the same transaction, all justify fees that even go into the millions, due to the immense time, complexity and non-systematic dynamics typically associated with these deals.
As you are reading this article, the option of a new app or two which would somehow help facilitate the loan process is likely being added to your smart phone.
The power and flexibility to change the CRE financing landscape is, for the first time, shifting from the older generation to the generation who has the data and capability to outperform by combining their experience, relationships and the astounding magic in their hand.