The commercial real estate industry continues to see rapid-fire evolution in financial tech solutions. NREI recently spoke with Frank Muhlon, head of transactions at CrediFi Corp., to hear more about what’s ahead for this segment of the market. CrediFi provides data and analytics for commercial real estate finance. The company recently launched its latest fintech solution, CreditfX, an online marketplace for financing commercial properties.
NREI: Looking at the big picture, how do you think technology is changing commercial real estate sales and finance?
Frank Muhlon: It is changing in a great deal of ways. From a very high level, you are driving an industry through information. You have more reliable and actionable data. The research around that data and the analytics that go with it can result in significantly more market transparency and efficiency, which leads to better decision-making. The more you know and the sooner you know it, the faster you can act on it.
For sales and financing, technology allows for faster and broader market reach, meaning you have the ability to get to multitudes of investors and lenders. Being able to get to those people faster is really helping to drive the business.
You can drive transaction costs down substantially. Acquiring new customers and new opportunities at a lower cost is key. The other area is risk mitigation and the opportunity to reduce your risk, which goes hand-in-hand with more transparency and more information.
Tech also drives operations and process efficiencies by being able to automate certain processes and streamline operations. And it helps to create scale across different platforms and reach a critical scalability across the small and middle market, which frankly wasn’t achievable without technology.
NREI: What kind of disruptor has tech been in the commercial real estate industry, which still seems to cling to its “old school” ways of doing business?
Frank Muhlon: At its heart, it has always been a people business and I really don’t foresee that changing. But tech and innovation have been a hallmark of commercial real estate for some time. Eight to 10 years ago we went through a significant and humbling downturn and going through that adversity brought innovation and numerous opportunities. Institutional capital, debt and equity capital got reshuffled, and it presented some opportunities in the marketplace.
The tech eco-system is broad, from leasing management systems and tech brokerage to mortgage tech, data evaluation and analytics, property information, financial data, marketplace platforms, building systems, etc. Tech is now touching all of those spaces in ways that didn’t exist before.
I think there is a segment of our industry that is not completely convinced that tech is necessarily disrupting our business in the way that it is disrupting other industries. We are using tools that enhance existing products and traditional approaches, but not everything has been fully reinvented. So I think the ceiling is pretty high and we still have a way to go before we even approach what could be disruptive in this business.
NREI: How rapidly is this fintech space growing in terms of new companies, solutions and capabilities?
Frank Muhlon: It is definitely a hockey stick in its growth trajectory. We’re seeing unprecedented innovation and entrepreneurship in commercial real estate. In the last five years, the crowdfunding space has grown. There were fewer than 10 pioneering real estate platforms focusing mostly on equity investment. Now there are arguably over 100 sites covering the entire capital stack.
Five years ago, crowdfunding as a whole was a few billion [dollars] in activity globally. In 2016, it was well over $50 billion. Real estate is a more modest piece of that, but it has grown substantially as well. There was about $3.5 billion in activity on real estate crowdfunding sites in 2016. That has been a tremendous growth market, and alternative financing and lending is seeing similar trends.
There are a host of direct online lenders that you can now find in that space. So we’re seeing substantial maturity in what is becoming online, cloud-based marketplaces. The online lending industry was about $40 billion last year and it could be upwards of $1 trillion in the next five years. You’re seeing significant investment and activity in the space, and that is really a huge driver in what is happening with fintech right now.
NREI: What have been some of the biggest hurdles that fintech firms have faced in getting established and achieving growth?
Frank Muhlon: We went through a very painful downturn 10 years ago. The business remains impacted by that. So you do have issues with market reception. Some are skittish just given their experience during the downturn, and many players aren’t ready to embrace alternatives or new options.
You have to go and find customers, not just folks who want to use your service or tap your capital source, but you are also looking for market opportunities. If you are serving as a market maker, you are looking for quality assets as well. So the challenge can be two-fold, raising money and finding people to invest in your platform, but also finding inventory so to speak.
Then you have a regulatory system that you have to comply with. These are certainly hurdles that can be overcome. Over time, the market is eventually going to vote with their wallets to determine where they are getting the best execution, the best flexibility and the best structures.
NREI: You recently launched CredifX. Can you briefly describe how this platform works?
Frank Muhlon: CredifX is the first cloud-based and data-driven commercial real estate financing marketplace for borrowers, brokers and lenders. The platform focuses on loans of $1 million and up across all major property types nationally. We leverage technology to match loan applicants with financing based on their criteria and the extensive loan product offerings in our lender network.
For us, it really starts with the data as a competitive advantage for us and our clients. It’s what allows us to provide those increased levels of transparency and process efficiency in the transaction, and ideally, result in the best execution for everyone.
NREI: What part of the capital stack are you focused on?
Frank Muhlon: The short answer is that we are leading with senior debt, whether it be senior mortgages, bridge loans, hard money loans or agency debt. That is not to say that we wouldn’t fulfill a request for a construction loan or mezzanine financing or joint venture equity down the line or even now. But, to be clear, we are not a direct lender or a crowdfunding site. We are a marketplace that matches borrowers and brokers with lenders. We are matching algorithmically the request from a borrower or broker with the most appropriate lenders for them.
We are especially focused on those small and middle market borrowers that have been underserved in the marketplace. These may be groups or individuals that may not refinance their properties very often and don’t have active broker and lender networks, and we can bring them off the sideline.
NREI: Can you give us a forward look at how the fintech sector is evolving and what’s ahead in the near term?
Frank Muhlon: I wish I had a crystal ball on that, but I will say that we are clearly going to see more cloud-based mobile technology services. Real estate is a business that’s on the go, and you want your teams to have access to the same data information to make faster, better decisions.
Platforms that are aggregating data, whether for buildings or user behavioral patterns, all of that data is going to be information that the real estate industry wants to get its hands on. We want to know how people are working and living, how they are buying, selling and financing properties and other tendencies.
Automated credit scoring and risk mitigation and machine learning are incredibly exciting. The ability to better understand the requests and applications coming in so that you can be smarter about how you are lending and how you are underwriting those applications. In the small and middle market, the technology makes the scalability possible. Being able to sell small buildings or do small loans in a faster way, that wasn’t really possible at this scale without technology.
There is tremendous expansion and specialization within the alternative finance industry. There are so many players, but still room for growth in that space. At the end of the day, we are trying, through technology, to solve challenges and remove choke points in a traditional process. Over time, that will be received better with each innovation.