Market analysis has an undeniable role in the risk management aspect of CRE lending. Per Interagency Guidelines, there are permitted instances in which a market analysis based evaluation may substitute an appraisal.
Of course, a well-diversified portfolio is the first line of defense in risk management, meaning that major lending institutions with nationwide portfolios need to be informed about not only the condition and use of their assets, but also about the external influences on these assets’ values, i.e. market trends & data.
A solid market analysis will provide an understanding of whether or not a lending institution’s policies and procedures are still appropriate in any given area. The most effective way to understand the impact of changes in the market on an asset’s value is through a sales comparison analysis using quantitative adjustments. Interagency Guidelines mandate that these evaluations contain sufficient information regarding the asset to support any credit decision made by the lending institution. This content includes a Market Value of the asset, taking into consideration current condition, use and zoning. The most effective use of this process would include evaluations of each asset individually, as market conditions differ greatly based on not only location but also property type.
By permitting themselves a clear understanding of the current value of assets in their respective portfolios, these institutions are providing themselves with an opportunity to re-evaluate their previous lending decisions. The information exposed by these market analysis based evaluations will allow a solid foundation from which to determine the correct decision regarding expansion in existing markets, entering new markets, or pursuing new lending activities entirely. This new understanding of current Market Values will help to shed light on the true solvency of the assets in their portfolios.