Leveraging Technology to Improve CRE Portfolio Risk Management During Major Global Events

by Mark Prior, Founder and CEO

The COVID-19 pandemic brought an incredible amount of uncertainty and upheaval to the commercial real estate sector. For example, for those with notes on restaurants in several counties, some may have been fully open, some only for takeout, and others completely shuttered. 

Were you able to assess the impact those varying levels of closure would have on your portfolio? Could you proactively manage your loan portfolio and respond to risk? The right technology can give CRE lenders incredible insight. Here’s how Qualtik streamlines CRE risk management, helping banks anticipate and minimize risk even in unanticipated times.

Impact

During COVID-19, borrowers saw an increase in short-term liquidity issues due to delayed rent collections, lack of occupancy, and increased operational costs. Leasing volumes nationally declined significantly, and many hotels, shops, malls, offices, and coworking spaces closed or severely curtailed operations. 

For some sectors, operational costs rose due to increased cleaning and sanitation requirements. Others incurred increased costs for security personnel due to empty offices. Hotels and retail were hit hardest at the start of the pandemic, but offices were in an interesting position as well, as we have since faced a paradigm shift given the permanent change many companies have since made to remote or hybrid work.

Response

The best way to deal with uncertainty is to operate from an informed perspective. Run lots of models and scenarios, in real time, so you’re not surprised, regardless of what comes to pass.

Analyzing the impact COVID-19 would have on CRE loan portfolios was complicated. The pandemic affected different sectors in different ways, and the environment changed continuously. In order to understand how these changes impacted the risk profile of a portfolio, banks applied stress differently to retail notes than to hospitality or office, for example. 

During major global events, loan portfolio managers need to be able to filter their loans using multiple variables in order to find the exact notes that may be headed for trouble. Analysis needs to be quick and easy, so that it can be done frequently. Bottom-up stress testing and forward-looking valuation strategies are especially important during dynamic events like COVID-19.

Most commonly used software solutions don’t provide the level of granularity, speed, and flexibility needed to respond quickly and proactively. It’s possible to do complex stress testing using spreadsheets, but it is time-consuming, hard to scale, and difficult to use consistently across multiple stakeholders. In a shifting market, it’s hard to justify the time investment required, knowing that as soon as your analysis is complete, it could be obsolete, and you’ll have to invest that time all over again. In addition, spreadsheets don’t show what will happen to the portfolio visually—in an infographic-style report that makes it much easier to quickly find specific segments that are at risk.

In order to proactively manage your CRE loan portfolio you have to be able to measure it and monitor it, in the moment, as the market is shifting. The right tool gives you that instant visibility. Here’s what to look for in a software tool to augment your core system and specifically address stress testing.

Solutions and Tactics for CRE Risk Management

The key to understanding your options and strategies for risk management in a fluctuating CRE market is the ability to understand your portfolio in multiple dimensions and scenarios. You need a tool that will let you:

• Filter your portfolio by criteria such as NAICS code, location, property type, vintage
• Apply stress to interest rate, cap rate, and NOI
• Display results visually, so you can see the migration of loans from their current state to mild, medium, and severe stressed states

With the right tool, you can look at your retail loans over $1MM in a particular ZIP code and evaluate a CAP rate change to just those assets. You can filter out restaurants in specific MSAs that originated in the last 3 years, because you know a new regulation is going to impact those businesses. You can apply stress to NOI for multifamily notes in your portfolio to identify the loans that are at highest risk. All of this granular visibility allows you to be proactive.

Conclusion

COVID-19 substantially impacted commercial real estate portfolios, and some of those impacts have continued today, long after the vaccine was developed and lockdowns were lifted. Bottom-up stress testing and valuation are especially important during and after such dynamic events—forward-looking and multiple-scenario analysis that helps us keep ahead of portfolio-changing events. 

Beyond COVID-19, accelerating and deepening your analysis and understanding of your CRE loan portfolio will set your institution up for greater growth. Now is the time to put the power in your hands to find and address risk proactively, with Qualtik: powerful, real-time stress testing and CRE asset management, built for community banks. If you’re ready to see the impact Qualtik can make on your institution, schedule a demo today!