HOW BLOCKCHAIN WILL REVOLUTIONIZE THE FUTURE OF COMMERCIAL REAL ESTATE
Blockchain technology is a topic of discussion on every major news channel, newspaper, finance blog, and investor group—from your office Slack or Zoom chats to r/investing or r/wallstreetbets on Reddit. What is less discussed, not altogether unsurprisingly, is how this radical new(ish) technology will impact the real estate world.
How is Blockchain Used in Real Estate?
Blockchain technology almost seems like it made for real estate. It’s a solution crying out for a problem and is exactly what the real estate world needs right now. While blockchain technology is still fairly new, its applications potential is just beginning in the real estate sector.
Blockchain has already made massive strides as a digital investment vehicle for both real estate funds and individual properties, like:
- Your friendly neighborhood shopping center
- A multifamily apartment building in your town
- A triple net lease asset with stable income and long-term stability
The beauty of combining blockchain and real estate comes down to the fact that funds and single assets can be translated into digital shares or “tokens,” which can be created at almost every single stage of the investment lifecycle.
That includes raising capital and placing your money in investments during the investment holding period (typically to stimulate liquidity). You can also tokenize at the end of the investment, selling the asset in the form of a digital share or shares rather than traditional paper methods. These are the three core uses for blockchain technology today.
Related Link: Buy Luxury Real Estate on the Blockchain
What are the Benefits of Blockchain Technology?
At a high level, blockchain technology can provide tremendous benefits to the real estate industry, financial sector, and society as a whole. These are just some of the benefits offered by the technology:
- More Transparency
- Better Security
- Reduced Costs
- Tax Efficiency and Speed Gains
- Improved Traceability
- Increased Asset Liquidity
These qualities apply to all blockchain technology applications—from well-known uses like payment facilitation (aka Bitcoin and Ethereum) to more niche uses like supply-chain management, data sharing, tax regulation, and compliance. But, you might be wondering, what does blockchain have to offer for the real estate industry?
Keep in mind that blockchain technology was created to quickly and effectively track the movement of products, security interactions, transactions, and other data. This translates into increased liquidity for real estate investors, sponsors, developers, and other stakeholders.
Liquidity for real estate is incredibly important; unless you invest in public equities or REITs, you are typically locked into a real estate deal for 5, 7, or even 15 years. If you need access to that cash in case of an emergency or want to take advantage of another opportunity that presents itself, you are not left with many good options. This is where Blockchain comes in to unlock wealth for investors.
Combining blockchain technology with real estate allows for more liquidity across the sector with enhanced buying, selling, and trading options. For instance, you can enable peer-to-peer transactions on the Blockchain where you can quickly, easily, and permanently trade properties with other investors by exchanging tokens, rather than having to go through the pain of traditional paper transactions.
More Freedom and Exposure Through Automation
A second liquidity benefit is the ability to list your shares on multiple online exchanges, not only in the US but worldwide. With the power to trade 24/7, 365 days a year, you can reach more potential investors than ever, all without the hiccups and hang-ups that are ever-present in the traditional financial system. (It doesn’t make a lot of sense that you can’t trade on a Sunday in 2021.)
Automating transactions with blockchain technology allows you to trade anytime, anywhere, as long as the trade is approved—a substantial improvement to the way most of us currently trade real estate.
Additionally, automation gives you access to your capital in seconds instead of days. Rather than having to wait for the standard settlement period, you can sell your digital tokens and instantly gain access to your money without having to plan your moves around someone else’s schedule.
Smart contracts enable you to do this; they are, essentially, smart pieces of digital paper that hold all your economic rights and requirements, like who is allowed purchasing power, when your funds are available, and more.
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What are the Challenges of Blockchain Technology?
Of course, no technology solution is ever perfect. There are four core challenges within blockchain technology, which include:
Government Adoption of Digital Currency
Governments and central banks are starting to see the value in adopting a digital currency. The United States, China, India, and several other nations are coming out with initiatives to create digital currencies in one form or another. These developments may prove challenging as governments tend to try to control financial resources.
However, state adoption of blockchain technology may benefit investors in the long run because these digital currencies may easily integrate with a real estate blockchain—but this is still up in the air for now.
Digital Securities (Un) Familiarity
Many people do not know about the technology of tokens or digital shares that can let them trade on multiple blockchains—Bitcoin, Ethereum, etc. Educating investors and consumers about this new way of business may be an obstacle to adoption or growth, but certainly not an impossible one.
In fact, you don’t need to completely understand the details of the technology—that is what decentralized finance (Defi) service companies are here for.
Fostering a truly collaborative atmosphere is not easy, even with the best circumstances. Transparency is a huge value-add to blockchain technology, but getting various governments, institutions, financial organizations, investors, and even consumers to believe in the value of this collaborative spirit is a major mountain to climb going forward.
Technology Provider Adoption and Adaptation
Finally, real estate on the blockchain may face barriers from technology providers, either intentionally or unintentionally. Technology providers need to determine who is the best, who has a proof of concept, and who has done their due diligence to create access to the real assets worldwide.
How will Blockchain affect Deal-Making in the Commercial Real Estate Space?
As we mentioned earlier, one of the biggest values added by blockchain is the added liquidity. Real assets of private equity funds, general real estate funds, single syndications, or even single building deals will have increased liquidity if backed by blockchain technology.
Picture this: your money is locked up in a real estate fund, and you want to get it out. Frequently there are buyback methods or mechanisms that you can use to resell your shares from the fund; but, this takes time because they are private, and it takes some degree of operations to distribute that kind of money for a single syndication or deal.
If, instead, you create the digital share from the fund level, the blockchain provides a path to liquidate your assets. With a single asset for a joint venture, you can essentially tokenize the economic rights of your position in the building while the other partner(s) can stay in the deal.
You can now use your tokens to raise capital, trade digital shares to stimulate liquidity in the middle of the hold period, or you can even go off and sell the asset entirely.
Keep in mind that commercial real estate is not just about making the deal; it is also about running the deal. You always have to be leasing your property, which can be quite a strenuous process from a legal perspective—getting documents signed, codes and laws followed, etc.
Automating the leasing process introduces the smart contracts we mentioned earlier, which will help mitigate a great deal of time during the process.
What Hurdles Will We Experience in the Future?
When combining real estate and blockchain technology, there are four main hurdles we can expect to see in the future. The first is education—understanding what blockchain can do and showing people what it does is important to overcome because people are often uncomfortable with change.
One of the more important factors is making sure that everyone understands what this product offers and that it isn’t a cryptocurrency. The blockchain is a vehicle of exchange that provides freedom for investors, deal sponsors, developers, and many more in the real estate industry.
The second obstacle is entity adoption and adaptation; banks, governments, and other parties have a significant stake in the current financial system. They will not relinquish power without either causing friction against blockchain technology adoption or somehow inserting themselves into the process.
This leads to our third point: regulation. Here in the United States, FINRA and the SEC can stop any number of financial practices related to blockchain technology. Regulators often fear what they do not understand. This comes into play not just in the US but globally. However, there have been a few significant breakthroughs on this front.
There is a compliance rule under the SEC act that gives broker-dealers the ability to maintain custody of digital assets for a 5-year period without being subject to enforcement action under certain conditions.
This is critical for the technology moving forward because broker-dealers can now operate without nearly as much of the regulatory burden. The restrictions and penalties involved in such a harsh oversight climate would likely severely stall growth.
Did COVID-19 Impact how Blockchain Technology affects Commercial Real Estate?
COVID-19 has accelerated the dawn of the digital age for leasing and legal documents in electronic form. For instance, look at hospitals and supply chains. Some hospitals, pharmacies, and other medical centers have been implementing blocking technology to track the vaccine supply chain and distribution to get accurate numbers.
Though the world is opening back up, one permanent change brought on by this pandemic will be less physical exchanges of currency. Say you are buying a coffee; you will probably lean towards using your card over cash. The same goes for documents in the real estate world.
Stakeholders will likely want to reduce in-person contact as much as possible, especially now that the door has been opened and companies see the potential cost savings from digital solutions.
Final Thoughts on Blockchain and Commercial Real Estate
The ecosystem of business and society is prone to comfort and often resistant to change. However, that same ecosystem is incredibly resilient in the face of adversity. When change is required, we tend to embrace it wholeheartedly in the end.
Think about online trading systems, like E-Trade. These service providers started to become more sophisticated and had proof of concept. The E-trade systems of the world, and now Robinhood, broke the non-online brokerage firms, leading to reduced costs almost across the board and revolutionizing the brokerage industry.
Similarly, for commercial real estate, tokenizing assets speeds up transactions and offers a competitive edge for settlement time and reduces counterparty risk because the online services and technology itself are so much more powerful. Blockchain technology unlocks the trillion-dollar real estate industry to investors worldwide and provides liquidity to the traditionally illiquid offerings.
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Related Link: Liberty Real Estate Fund Acquisitions