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. Register to receive future editions, straight to your inbox.
About ten years ago, cryptocurrencies began to appear in the residential real estate market. There were stories about the first house sale in Bitcoin, but in reality it was just people buying in the currency then converting it back to dollars.
Now, crypto is used more for leverage. Lenders like Propy use it as collateral for residential and commercial real estate loans, so buyers don’t actually need to sell their bitcoin or other digital currency to buy. They want to hold onto crypto because it typically appreciates much faster than the real estate market.
Investors can certainly use cryptocurrency to purchase commercial real estate assets, but it is blockchain, where the crypto resides, that the CRE industry is ultimately, albeit slowly, adopting.
“The commercial sector is on the cusp of really adopting it, so we’re at the limit,” said Tony Giordano, founder of the Opulent agency.
Giordano is a luxury real estate broker, who was one of the first crypto pioneers in the field. He began training his fellow brokers, through social media and conferences, on how to buy and sell properties in Bitcoin. He is now studying the impact of this measure on the commercial sector.
“I don’t see how the entire real estate industry won’t be on blockchain within 10 years. You know, it’s right here, and people are already recording everything on it, and it’s the most secure platform and technology to do it,” he said.
Giordano describes blockchain as a huge virtual filing cabinet, where billions of documents can live forever without risk. This includes cryptocurrency, mortgage bonds, securities, deeds, literally everything.
A Deloitte report examined how the company is already transforming the commercial real estate market:
“Until recently, blockchain was best known as the technology that powers Bitcoin. However, industry players are now realizing that blockchain-based smart contracts can play a much larger role in CRE, potentially transforming core CRE operations such as real estate 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 urban management,” the report said.
There are several ways to use blockchain for commercial real estate financing. One is tokenization. This process converts ownership rights of a CRE asset into digital tokens, allowing for fractional ownership and easier trading of shares of a property. However, as of now, US citizens cannot invest in tokenized US real estate as it is still regulated, but international investors can.
Another report released last April by Deloitte, specifically on tokenization, said: “This technology could help create billions 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. »
About $4 trillion in real estate will be tokenized by 2035, compared to less than $300 billion in 2024, according to the Deloitte Center for Financial Services.
Then there is the financing opportunity. Giordano highlighted BV Innovation, a blockchain platform creating transferable mortgage bonds for commercial and residential financing on the blockchain. Its AI-based software helps commercial real estate finance companies transfer loans with their current interest rates from one property to another.
“It would open up a lot more transactions if people weren’t sitting on that interest rate. So now with AI and blockchain, it can connect it to any bank and allow them to transfer the mortgage and the interest rate to the new property,” Giordano explained.
The AI automatically performs the risk analysis on the new property, which lets the bank know that it is a quality property for the existing interest rate. The owner does not have to pay the prepayment penalty, which is very common in commercial real estate. This allows them to use what would have been a prepayment penalty as an asset to invest in another property. Giordano says 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 percent rate on that $20 million. You also have a prepayment penalty for seven additional years that doesn’t allow you to sell the building without paying a $4 million penalty,” he explained.
“They don’t need to understand that AI and blockchain help the bank do it. They just understand that it’s secured by blockchain.”
