How Big Data, Machine Learning are Shaping CRE Finance

A new white paper from the MIT Center for Real Estate examines changes and trends in commercial real estate financing that are being driven by these technologies.
Anne Kinsella Thompson
Anne Kinsella Thompson, visiting lecturer & research analyst, MIT Center for Real Estate

The powerful combo of big data and machine learning is having a substantial and growing effect on CRE financing, particularly in the area of automated valuation models (AVMs). That’s a key conclusion of Commercial Real Estate at the Crossroads: What’s driving the market, what’s holding it back, a new report written by Anne Kinsella Thompson from the MIT Center for Real Estate and sponsored by Capital One Commercial Banking.

Though the overviews of head- and tail-winds in the economy and the CRE sector, and in specific product types, are worth reading, what makes this report distinctive are its observations on changes and trends in CRE financing that are being driven by these technologies. “Big data is having an extraordinary impact on the growing diversity and number of sources of real estate financing,” according to the report. The impact of machine learning on CRE markets “is one of the most important trends that will define the path of CRE for the next few years.

The ability of this form of artificial intelligence to assemble and analyze property information more quickly and more accurately than in the past, now used mostly on the residential side, will have broad reverberations across commercial development, investment, lending and brokerage, the report predicts.

One aspect of this process, the AVM, has seen use in the residential sector, and now is “likely to grow in prominence and expand to the commercial sector,” according to the report. In fact, the first AVM for the commercial side is expected to hit the market in the coming months.

A significant part of the expansion in non-traditional financing is in crowdfunding. The report notes that although it represents only $2.5 billion of the $7 trillion CRE market, crowdfunding “presents major potential for growth.” Crowdfunding’s advantages versus investing in REITs include increased transparency and more flexibility for the investor to control the amount of money invested, as well as possible tax breaks.

The role of foreign investment

The report also discusses the “robust” role that foreign investment in U.S. CRE has played since the start of the recovery, noting that through 2017, the nation continued to be the world’s largest recipient of foreign direct investment.

The driver of much of that investment, especially in large transactions in major cities, has been the federal government’s EB-5 program, under which foreign nationals who invest at least $500,000 in an enterprise that creates 10 or more jobs can gain permanent residency.

Though popular—EB-5 money has been used, for example, in the $25 billion Hudson Yards development in New York—the program faces an uncertain future. The report notes that it has been extended on a short-term basis multiple times in the past three years, most recently on Sept. 30.

Thompson is a visiting lecturer & research analyst at the MIT Center for Real Estate. She was an economist at Dodge Data & Analytics (formerly McGraw-Hill Construction) for 10 years and holds master’s degrees in real estate development and in city planning.

The full report is available here.

Image courtesy of MIT Center for Real Estate