By: Christine M. Walker | February 6, 2025
As published in the Daily Business Review
Artificial Intelligence (AI) is revolutionizing various industries, and commercial real estate is no exception.
At the research stage, AI can evaluate multiple risk factors, such as environmental hazards, market trends, and financial performance, providing a comprehensive risk profile for the property. AI tools can analyze historical data and current market conditions to predict future trends. Additionally, AI can identify seasonal trends in the real estate market, such as periods of high or low demand. This information is valuable for timing property purchases and sales to maximize returns. By identifying patterns and correlations, AI helps investors and real estate professionals anticipate market shifts, such as price fluctuations, demand changes and vacancy trends. This comprehensive risk assessment helps investors make informed decisions and mitigate potential losses.
When performing due diligence, AI similarly offers transformative potential by enhancing the efficiency, accuracy, and comprehensiveness of the process. AI has the potential to automate and enhance various tasks through it's ability to analyze a vast amount of data. For example, when evaluating title, AI can flag potential discrepancies with liens and encumbrances. AI can also cross-reference property details through use of geospatial and satellite imagery, with local zoning laws and regulations to predict potential risks. Additionally, AI can detect fraudulent activities by recognizing irregularities in transaction histories or documentation, providing an additional layer of security and reliability.
For instance, AI could analyze attributes within leases to identify advantages and disadvantages. If the lease calls for the payment of percentage rent, is the tenant the type likely to pay the percentage of rent honestly? Does the tenant or its beneficial owner have a history of bankruptcies? Are those bankruptcies in real estate transactions? What are the strength of guarantees in the lease? Through analysis of various public documents, AI can provide answers to these areas of inquiry. And, at the end of the due diligence process, AI can produce a due diligence report, highlighting key findings, risks and recommendations.
During the contract phase, AI can review legal documents and financial records, extracting relevant information and highlighting critical points. This has the potential to speed up the contract review process, allowing real estate professionals to finalize deals more swiftly. AI can flag potential risks, such as non-standard clauses or missing information, allowing legal teams to address these issues proactively. Likewise, AI can compare contracts to relevant laws and regulations, reducing the risk of legal disputes. However, AI has an inability to "understand" the nuances and context of complex legal language, making a skilled real estate lawyer critical to all transactions.
Although AI has great potential to aid in real estate transactions, the AI system must have adequate safeguards in place to protect sensitive information. Depending on the documents uploaded into the AI system, the AI might have all of the buyer and seller's personally identifiable information and financial records. Ensuring the secure handling and storage of this information is essential to prevent breaches and unauthorized access. Similarly, a best practice includes advising clients of the intent to upload data into an AI system and receive explicit written consent.
In addition to the challenges associated with data privacy, AI suffers from limitations arising from its training data. If the training data contains biases, the AI will perpetuate these biases, leading to unfair outcomes. In the context of real estate transactions, biased algorithms can result in discriminatory practices, such as inaccurate property valuations or unfair tenant screening processes. Consequently, users must perform regular audits and updates of AI systems to identify and correct biases. These evaluations ensure that the AI remains fair and accurate over time. An AI governance system for users also aids in facilitating the ethical use of AI.
Despite some of the drawbacks related to AI arising from data privacy and algorithmic bias, several large real estate investors have successfully began integrating AI into their protocols. Jones Lang LaSalle utilizes AI for property management and valuation, while CBRE utilizes AI for predictive analytics, price forecasting, and optimizing portfolio management. On the lender side, Wells Fargo uses AI for underwriting, JP Morgan deploys AI for predictive analytics and Bank of America has implemented AI to aid in automating the loan application process, such as document verification. Specific AI programs tailored for real estate transactions also exist beyond the standard offerings of the better known Westlaw CoCounsel and Lexis + AI.
Surely, more real estate specific AI offerings will continue to role out as technology progresses. As developers deliver more AI products to the market, AI costs should also go down based on the increased product competition. As costs go down, it's very possible that utilizing AI in certain parts of the real estate transaction process will become standard operating procedure.
In summary, AI has the capability to fundamentally transform commercial real estate transactions by enhancing efficiency and accuracy in due diligence, contract review, and market analysis. AI's ability to swiftly process and analyze data allows for more informed decision-making and risk management, which could prove particularly helpful in certain arenas, such as commercial leases. However, as the use of AI becomes more common place, the industry must continue to address challenges such as data privacy and algorithmic biases to ensure ethical and equitable outcomes. One mechanism to address such concerns is through the implementation of an AI governance system. However, by prioritizing transparency, fairness and the ethical use of AI, the real estate sector can fully leverage AI's capabilities, paving the way for a more innovative and responsive market.
Christine M. Walker, a Shareholder at Fowler White, advises clients on Artificial Intelligence matters. She received training from MIT’s Sloan School of Management in Business Strategy Implications of Artificial Intelligence in addition to an LL.M from Tulane University Law School and her Juris Doctor from Nova Southeastern University Shepard Broad Law Center. She may be reached at cwalker@fowler-white.com.