Work smarter not harder: The impact of blockchain on CRE

So far in this blog series, we’ve looked at some of the most cutting-edge emerging technologies: The Internet of Things (IoT), robotics, and virtual reality. We’ve discussed the potential these developments have to revolutionize the way we do business and work in the real estate space. 

While each of those has its applications, none hold quite the same promise for changing the fundamental aspects of how we make, and document, commercial real estate (CRE) deals as blockchain. In this fourth entry in the emerging tech series, we have a look at the implications of this pivotal technology.

Blockchain basics

Nowadays, blockchain is a term everyone’s hearing with increasing regularity. To start, it’s worth having a brief recap of exactly what the tech is. At its simplest, a blockchain is a ledger – a record of information. Not all that different from the databases you’re already using to record details of properties, clients, or transactions. 

The feature that makes blockchain unique is the way that information is recorded. Each “block” can hold a certain amount of data. Once a block is full, a new block is started and the previous block forms part of an immutable chain – essentially a timeline extending outwards from the first block to the current one. 

Information on the blockchain is public and distributed across a network of computer systems – meaning that it’s very, very difficult for one person to hack or alter the information stored in the chain. 

Streamlined data

The opportunity blockchain presents for the CRE space, is the ability to streamline a lot of time-consuming tasks. Imagine having all of the paperwork for a given property digitized, accessible to everyone involved in the deal, and confirmed as accurate by multiple parties. 

Steve Weikal, MIT’s Head of Industry Relations at the Center for Real Estate, describes it like this:

“There are two areas where I think the blockchain is. There’s going to be the intersection with legal tech, so that’s land registry and recording and ownership, and all of that paperwork that exists in the system… the other is the intersection with fintech.”

Of course, an issue that comes up here is how this system can be used with potentially sensitive information – client details that shouldn’t be a matter of public record. For business networks, private blockchains can be set up to only allow access to specified parties. In this case, the identity of participants is verified in the network as well, unlike public blockchain where users can remain anonymous. Private blockchains function more like a traditional database in this sense, trading off some of the immutability of their data for privileged access. 

Sealing the smart deal

Maybe the most promising application of blockchain for CRE deals is being able to deploy “Smart Contracts” for things like tenancy agreements. Smart contracts hard code the details of an agreement on the blockchain, and are uniquely suited to real estate deals, because they can handle conditional clauses. 

As an example, startups like UK-based Midasium are already providing a prototype platform that replaces traditional landlord-tenant agreements. Using smart tenancy contracts, clauses of the agreement are automatically enforced when certain conditions are met. This can include paying rent, returning a security deposit, and directly deducting maintenance costs from the rental amount paid across to the landlord. 

It’s a system designed for transparency and rapid settlement, and the concept is gaining traction in other parts of the world. An added bonus of using smart contracts for tenancy is the possibility of building up a database of real-time data for rental prices and trends in the rental market.

A growing sector

Overall, enterprise reliance on blockchain is set for rapid acceleration. Forbes, quoting an International Data Corporation (IDC) report notes that:

“Investment in blockchain technology by businesses is forecast to reach almost $16 billion by 2023. By comparison, spending was said to be around $2.7 billion in 2019, and we will see this acceleration ramping up over the coming year.”

Blockchain adoption in CRE, however, is still in the early stages. The tech still needs to overcome a few growing pains – in terms of privacy concerns, operational complexity, and a lack of standardized processes – before we’ll necessarily see it forming the backbone of CRE transactions.

That said, it’s a space well worth keeping an eye on. There’s been growing interest, for example, in CRE tokenization –  splitting the value of a given asset into separately buyable blockchain-based tokens. What this means in practice is that instead of looking for one buyer for an expensive asset the value gets subdivided and opened to a much broader market. Which in turn may actually boost the value of the underlying asset.

There’s a lot of potential and little doubt that blockchain will make its way into CRE one way or another. But, like many things in the cryptocurrency and blockchain space, the real challenge will be separating the wheat from the chaff, the fact from the hype, and identifying functional applications of the tech rather than purely fanciful ones. 

Tracking the great return: Real estate and the investment case in late 2021.

News broke in late July that Apple was pushing back its ‘return to the office’ expectations by at least a month. CEO Tim Cook had previously flagged September as a likely date for the majority of its office-based staff to resume in-person, on-site work – based largely on the availability of the vaccinations.

Now Bloomberg – citing unnamed sources – says the technology giant is feeling less confident in this push to return as many in the US remain unvaccinated and new variants continue to plague health services.

This is a blow to the “return to the office” rhetoric which has dominated the news in recent months and may have knock-on effects for the commercial real estate (CRE) industry – in terms of development planning, new builds, and investor sentiment.

Mask up orders

This decision is informed by government mandates, according to the sources. Drawing from the New York Times stats, Bisnow writes: “The average number of new daily coronavirus cases in California, where Apple is headquartered, has tripled in the past two weeks”. In addition, they report, Cupertino – Apple’s ‘home city’ – and the Santa Clara County in which it sits has issued a statement calling for the return to mandatory mask-wearing.

The county’s collective statement reads: “[we] recommend that everyone, regardless of vaccination status, wear masks indoors in public places as an extra precautionary measure for those who are fully vaccinated, and to ensure easy verification that all unvaccinated people are masked in those settings.”

Markets react

This, as well as news on the effect of the Delta variant of Covid-19, has seemingly subdued sentiment on the markets, with the S&P500 taking a knock – dropping the most it has in two months, according to an additional Bloomberg report.

Despite this, many real estate investment trusts (REITs) and related investment vehicles are rallying. A contributor on the Nasdaq website takes a look at this counter-intuitive trend, pointing out that: “Vanguard Real Estate Index Fund ETF Shares (VNQ) added about 24.1% this year compared with 16.1% gains in the SPDR S&P 500 ETF (SPY)”.  They argue that inflation, housing price increases, “booming cloud business” are among the factors underpinning this resilience.

High yields

Finally, the relatively high yields of real estate are setting them apart from other investments, writing: “The benchmark U.S. 10-year Treasury yield was 1.38% on Jul 1. Against such a low-yield backdrop, dividends offered by real estate ETFs are quite sturdy.”

Tools of The Trade – Analyzing Investment Deals

toolsofthetradeinvestment-1

By Alec Pacella, CCIM
Managing Partner at NAI Daus
apacella@naidaus.com
(216) 455-0925
Twitter @dausyouknow

I always appreciate when readers of this column take the time to reach out to me. Sometimes I know the person and sometimes I don’t but regardless, it is certainly always a delight to hear your comments. Last month, while at a real estate event, I was engaged in a discussion by a reader. This particular individual had one pressing question. No, they didn’t want to know about my favorite ‘80s-era supercar (512 Testarossa) or how my Aunt Norma made her lasagna (old Italian women never reveal their exact recipe). This avid reader simply wanted to know what software I used to analyze investment deals. Simple question, not so simple answer – but it was asked so I’m obligated to answer.

Financial calculator
Although technically not software, it is an invaluable tool. I’m partial to the Hewlett Packard 10B but there are many alternatives available from calculator giants such as Texas Instruments and Sharp. Financial calculators have a few significant benefits. They are very powerful and capable of performing all sorts of financial calculations in seconds. Despite this power, they are very affordable. Most cost less than $50 and iPhone and Android emulator apps are available for even less. And they are extremely portable. Calculators can be stashed in the pocket of a sport coat, purse or briefcase and used quickly and easily in a variety of settings. If you are using an app on your phone, there is an even greater chance of having this powerful tool at your fingertips. However, all of this portability and affordability comes at a cost – namely, functionality. While determining the IRR of a series of cash flows will take just seconds, determining that series of cash flows will involve countless calculations, probably with a good dose of old fashion pencil and paper thrown in. And good luck if someone asks you to email the analysis to them.

Microsoft Excel
I use Excel more than any other tool, as it offers many significant advantages. At the top of the list is flexibility. Excel can handle anything from a single-tenant cap rate analysis to a multi-tenant discounted cash flow analysis to a tenant occupancy costs analysis. In many ways, the software is only limited by the underlying skills of the user. Financial calculations, such as IRR, NPV and loan functions are inherent. It’s easy to build templates that can be used and re-used without having to re-create the proverbial wheel each time. And it’s universal, so I can send the analysis to someone without worrying about them having difficulty in opening the file. Click here to continue reading entire article.