The Failure of CRE Investment Loss Mitigation in the Analytics Age

More than $500 billion in CRE loans and investments are expected to be realized this year, worldwide.  That’s an astounding number.  CRE investment loss mitigation practices have not proven to be up to the task (otherwise, the losses would be a lot less, wouldn’t they?).  The answer developed over the past few years has been to use analytics and big data to try and manage future loss severity risk exposure using analytics to project which transactions may go down the tubes based upon what has already gone down the tubes.  The problem is that risk management is really not as effective at the lender or investor level as it would be if the property level risk management programs and initiatives were proactive in nature.  There is an argument to be made that the current practices are more akin to putting the water hose in the south end of the mule and insisting the animal is getting watered than we would like to think.

But what of market risk and the evolving nature of competition?  That seems to have been the stumbling block that always trips up 5-year and 10-year projections of performance upon which lending and investing decisions have traditionally been predicated upon.  Having done literally hundreds upon hundreds of CRE feasibility study forecasts, the one thing we have really learned is that market forecasts looking beyond the next 24-month period are really a guess.  Market disruptions are a fact of life in market economies and we should embrace them rather than fear them.  CRE properties are particularly exposed to asset obsolescence risk that is the symptom of market disruptions.  If you don’t believe this, take a moment and think about what happened to all the lenders and investors who were part of the single-tenant lease deals for Sears, ToysRUs or other related specialty retailers to pick on just one CRE property sector.  Five years ago you would have been sorely tempted to invest in one of those properties.  After all, they were credit-rated tenants, weren’t they?  Seems like credit risk management practices and providers need to reconsider what they are doing just as much as the lenders, investors, promoters and issuers.

Maybe it is time we took a bigger look at the benefits of analytics and big data.  Maybe it is time we used these tools to create proactive loss severity risk mitigation in a way that actually works.  Maybe it’s time to take that next step.

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