A version of this article first appeared in the CNBC Property Play newsletter with Diana Olick. Property Play covers new and evolving opportunities for the real estate investor, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large public companies. Sign up to receive future editions, straight to your inbox.
Roughly a decade ago, cryptocurrency began to show up in the residential real estate market. There were stories of the first bitcoin home sale, but really it was just people buying in the currency and then converting it back to dollars.
Now crypto is being used more for leverage. Lenders like Propy are using it as collateral for both residential and commercial property loans, so buyers don’t actually have to sell their bitcoin or other digital currency in order to buy. They want to keep the crypto, because it generally appreciates far faster than the housing market.
Investors can certainly use cryptocurrency to buy commercial real estate assets, but it’s the blockchain, where crypto lives, that the CRE industry is finally, albeit slowly, adopting.
“Commercial is definitely right around the corner from really embracing it, so we’re on the edge,” said Tony Giordano, founder of the Opulent Agency.
Giordano is a luxury real estate broker, who was an early crypto pioneer in the space. He began educating his fellow brokers, through social media and conferences, about how to buy and sell properties in bitcoin. Now he’s exploring how it’s impacting the commercial sector.
“I don’t see how the entire real estate industry will not be on the blockchain within 10 years. You know, it’s just here, and people are recording everything already on it, and it’s the most secure platform and technology to do it,” he said.
Giordano describes the blockchain as a great, big virtual filing cabinet, where billions of records can live into eternity without risk. That includes cryptocurrency, mortgage bonds, titles, deeds, literally everything.
A report from Deloitte examined how it is already transforming the commercial real estate market:
“Until recently, blockchain was known more as the technology powering Bitcoin. However, industry players now realize that blockchain-based smart contracts can play a much larger role in CRE, potentially transforming core CRE operations such as property transactions (purchase, sale, financing, leasing, and management). Over time, blockchain adoption can have a broader impact, as it can be linked to public utility services such as smart parking, waste, water, and energy billing, and also enable data-driven city management,” the report said.
There are several ways of using the blockchain for commercial real estate finance. One is tokenization. This process converts ownership rights of a CRE asset into digital tokens, allowing for fractional ownership and easier trading of shares in a property. For now, however, U.S. citizens cannot invest in U.S. real estate that has been tokenized, because it’s still regulated, but international investors can.
Another report published last April by Deloitte, specifically on tokenization, said, “This technology could help build trillions of dollars of economic activity for the real estate sector over the next decade, in part, by allowing it to expand its investor base and product offerings.”
Roughly $4 trillion of real estate will be tokenized by 2035, increasing from less than $300 billion in 2024, according to the Deloitte Center for Financial Services.
Then there’s the finance opportunity. Giordano pointed to BV Innovation, a blockchain platform creating transferable mortgage bonds for commercial and residential financing on the blockchain. Its AI-enabled software helps commercial real estate finance companies to transfer loans with their current interest rates from one property to another.
“It would open up so many more transactions if people weren’t sitting on that interest rate. So now, with AI and blockchain, he can plug it into any bank and allow it to transfer the mortgage and interest rate to the new property,” Giordano explained.
AI automatically does the risk analysis on the new property, making the bank feel safe that it’s a quality property for the existing interest rate. The owner doesn’t have to pay the prepayment penalty that is very common in commercial real estate. This allows them to use what would have been a prepayment penalty as assets to invest in another property. Giordano argues it’s not as complicated as it seems.
“I think it’s easy for them to understand once you say, you have a 4.5% rate on this $20 million number. You also have a prepayment penalty for seven more 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 is on the back end helping the bank do it. They just understand that it’s secure from the blockchain.”
