Increasingly blockchain and in particular crypto has been encroaching on commercial real estate. While proponents of these concepts can point to solid use cases, there are also plenty of examples of how potentially unstable, unpredictable, and in some cases untrustworthy, many aspects of the collections of things called “crypto” can be. As these concepts continue to gain traction, it would seem a good time to step back, untangle some concepts, and then proceed with more attention to the risk to investments and also industry reputation.
There is already use of the blockchain technology underlying cryptocurrencies. For example, MarketSpace Capital tokenized a multifamily project last year, which in theory means more automation of process without as much physical paperwork. Rather than maintaining records in traditional fashions and generating quarterly statements and ACH transfers, by using tokens, a specialized cryptocurrency.
Tokens should allow greater liquidity, in this case after an initial 12-month holding period, without a special event like a sale. An additional concept for developers is that tokenization could practically enable more fractionalized ownership—technically possible today but too awkward in practice—that would open investment by millions more people, increasing demand that should push up the financial return.
NFTs, or non-fungible tokens, are often associated with “art,” often of dubious quality, as well as various celebrity attempts to further profit off their own fame. But they’ve already been employed to sell real estate, including rights to such things as exclusive ability to control for 75 years the lease of a room in a cooperative living arrangement.
Now for some critical thinking. There are significant limitations in the assumptions that are frequently encouraged in the crypto-related spaces. How strong is liquidity if the only option is to exercise it in a specific exchange? If you can’t buy and sell readily through the typical trading markets that attract the range of buyers as with stocks and bonds, like a REIT can often enjoy, then there are significant limitations, which translate to less demand and, perhaps, less return than vaguely promised. While the seller may get some percentage of increased value, that might not hold true for those who bought shares.
Some of the automation features in the field, like smart contracts that are supposed to make things happen in a speedy way, have potential dangers that professionals need to address.
As importantly, CRE needs to avoid potential reputational damage by association. For example, one event explicitly targets in part “crypto enthusiasts.” That includes the many who lose everything they put into someone’s questionable scheme. It’s time to step back and ask how an industry wants to present itself for the long term.