A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future issues straight to your inbox.
Cryptocurrencies first appeared in the residential real estate market about a decade ago. There were stories about the first Bitcoin house sale, but in reality it was just people buying the currency and then converting it back into dollars.
Now cryptocurrencies are being used more for leverage. Lenders like Propy use it as collateral for both residential and commercial real estate loans, so buyers don't actually have to sell their Bitcoin or other digital currencies to buy. They want to hold onto the cryptocurrency because it generally appreciates in value much faster than the real estate market.
Investors can certainly use cryptocurrencies to buy commercial real estate, but it is the blockchain on which cryptocurrencies live that is eventually, albeit slowly, taking over the CRE industry.
“The commercial space is definitely on the verge of really getting to grips with this, so we're on the edge,” said Opulent Agency founder Tony Giordano.
Giordano is a luxury real estate agent who was an early crypto pioneer in the space. He began educating his fellow realtors via social media and conferences on how to buy and sell real estate in Bitcoin. Now he is looking at how this affects the commercial sector.
“I can't imagine that the entire real estate industry won't be on the blockchain within 10 years. You know, it's just there and people are recording everything that's already on it and it's the safest platform and technology for it,” he said.
Giordano describes the blockchain as a giant virtual filing cabinet in which billions of records can live forever without risk. This includes cryptocurrencies, mortgage bonds, titles, deeds, literally anything.
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A report from Deloitte examined how the company is already changing the commercial real estate market:
“Until recently, blockchain was better known as the technology that powers Bitcoin. However, the industry is now realizing that blockchain-based smart contracts can play a much larger role in the commercial real estate industry, potentially transforming core business areas of the commercial real estate industry such as real estate transactions (purchase, sale, financing, leasing and management). Over time, the “The adoption of blockchain will have broader implications as it can be linked to and enabled by public utility services such as smart parking, waste, water and energy billing.” data-driven city management,” the report says.
There are several ways to use blockchain for commercial real estate financing. One of them is tokenization. This process converts ownership rights in a CRE asset into digital tokens, allowing fractional ownership and easier trading of shares in a property. However, US citizens cannot invest in tokenized US real estate for the time being because they are still regulated, but international investors are.
Another report published in April last year by Deloitte that looks specifically at tokenization said: “This technology could help create trillions of dollars of economic activity for the real estate sector over the next decade, including by allowing it to expand its investor base and product offering.”
According to the Deloitte Center for Financial Services, around $4 trillion in real estate will be tokenized by 2035, up from less than $300 billion in 2024.
Then there is the financing option. Giordano pointed to BV Innovation, a blockchain platform that creates transferable mortgage bonds for commercial and residential financing on the blockchain. Its AI-powered software helps commercial real estate financiers transfer loans from one property to another at their current interest rates.
“It would enable so many more transactions if people weren't sitting on that interest rate. With AI and blockchain, he can now connect it to any bank and allow them to transfer the mortgage and interest rate to the new property,” Giordano explained.
AI automatically carries out the risk analysis of the new property and gives the bank the assurance that it is a quality property at the current interest rate. The owner does not have to pay the early repayment penalty that is usual for commercial properties. This allows them to use what would have been an early repayment penalty as an asset to invest in another property. Giordano argues that it is not as complicated as it seems.
“I think it's easy for them to understand when you say you have a 4.5% interest rate on that $20 million figure. You also have a prepayment penalty for another seven years that doesn't allow you to sell the building without paying a $4 million penalty,” he explained.
“They don't have to understand that AI and blockchain are in the background helping the bank do this. They just understand that it is safe from the blockchain.”