Investment loss severity risk remains the key issue investors and lenders go to bed with each night and wake up with every morning. I read online the commercial real estate industry worldwide is facing more than $500 billion in losses this year. That’s more than the GDP of the world’s 26th largest economy. I well remember the late 1980’s and the promise that FICO scoring would end the terror of investment loss severity risk and yet here we are decades later facing the same beast. Today many lenders and investors utilize complicated analytics to try and predict what investments or loans will go down the tubes next based upon the ones that are already in the graveyard. This will likely turn out to be a fool’s hope that will include throwing out the baby with the bath water as both the analytics tools and FICO tool are reactive tools that speak to mitigating the losses that have already occurred. It’s time to stop nailing the barn door shut after the horse has already left and go to a proactive approach.
The promise of artificial intelligence has allowed our firm to realize the means to provide proactive forecasting based on the only thing that matters – what is happening right now in the near-term future in a commercial real estate property’s local market in terms of advancements in technology and innovations that create the conditions that lead to declining performance and asset obsolescence with the potential for foreclosure and bankruptcy petitions being mitigated before they have the opportunity to become a real issue. This approach allows us to support an investment for the full term of the asset holding period and the cost is peanuts both in terms of its relative cost to the transaction itself (less than 1.5% over a 10-year subscription period) and in terms of the costs associated with investment loss severity risk that apply in its absence.
If we are going to get serious about prevention of investment loss then we have to be prepared to discuss the totality of risk issues we face in commercial real estate and provide an end-to-end solution approach to prevent these issues from becoming everyone else’s problem and our own nightmares.
The times, they are a’-changin’…