Advances in artificial intelligence and machine learning are slowly changing the processes of buying and selling commercial real estate. Although widespread adaptation appears to be several years off, the application of new technology within commercial real estate appears inevitable and of enormous value. In particular, the opportunity appears greatest within the realm of property valuations, according to David Mitchell, business intelligence and operational specialist with Chicago-based Alliant Credit Union.
“Developing more accurate evaluation techniques will help set healthy interest rates and lower credit costs,” he says. “This points to more efficient loan capital in the market. That’s the ultimate outcome: more efficiency and more liquidity in the market.”
Valuing commercial real estate is a tremendous exercise in synthesizing information, Mitchell notes. “Understanding factors such as rental rates, vacancy rates, employment growth, demographics, new construction supply, interest rates and capital availability are not simple propositions. Understanding the interdependence of these variables, as well as accounting for historical data and knowing how to properly weight the variables is more than any one human can synthesize in a rigorous manner.”
By contrast, a machine-learning model excels in an environment with massive amounts of interdependent variables. In many cases, the algorithms used in machine learning are not new constructs, Mitchell explains. “What is new is the availability of data and dramatically increased processing power. In this environment, a machine-learning model will be able to determine a property’s value in the same way Facebook knows how likely you are to click on an advertisement.”
As access to data increases, computer-driven property valuations will become more cost-effective and faster than traditional appraisals. Investors will benefit from rapidly and accurately understanding a property’s value in order to quickly execute a transaction or move on to another deal without wasting time and money.
From a lender’s perspective, advancing funds against a properly valued asset avoids undue risk, Mitchell adds. “And, as the technology becomes more accessible, it is easy to imagine updating the valuation on all properties in a portfolio within a few minutes. This will lead to active portfolio management, recognizing problems long before a payment is missed.”
Ultimately, a more efficient flow of capital with lower principal losses will allow lenders like Alliant Credit Union to deliver ever-improving terms on commercial real estate loans.
— By Amy Bigley Works, staff writer. This article was written in conjunction with Alliant Credit Union, a content partner of REBusinessOnline.