Get Smart

Blockchain can transform the industry, but will the profession embrace it?

Experts compare adaptation of blockchain today to the internet in the early 1990s. Like the internet, blockchain has the potential to transform the entire world, including commercial real estate and related industries.

But how fast will it be adapted by mainstream businesses, lenders, and governments? What form will it take for commercial real estate and related industries, and how will they apply it?

“There's a sense of inevitability with integrating blockchain into commercial real estate and especially the transaction process,” says Adam Hooper, CCIM, co-founder and CEO of RealCrowd in Portland, Ore. “But how long will it take, 18 to 24 months, or 10 years? We still are trying to figure it out. Usually commercial real estate professionals are not early adopters. But its use will spread quickly once it starts gaining traction.”

Digital Ledger

While many individuals associate blockchain with bitcoin, cryptocurrency is only one small component of what blockchain can facilitate.

Instead, think of blockchain as a digital ledger being maintained by a network of computer nodes. Each chain on the ledger can verify and track the commercial real estate transaction. These one-time-only, transparent transactions will occur and reside only online.

“At the points in the commercial real estate process where there is a third-party verifier, it will look different with blockchain,” says Steve Weikal, head of industry and alumni relations at the MIT Center for Real Estate in Cambridge, Mass. “This includes title companies, lenders, and listing services. Will we still need a recording office? These services may not go away entirely. But it will change how people interact with those services, and it will look different.”

While the possibilities are many, three significant potential benefits of blockchain involve smart contracts, streamlined title searches, and transfer of assets online. Smart contracts allow the deal to be completed online in code, creating more efficiency. It will become the public record for taxes, which will streamline the process significantly.

“Smart contracts can happen without human interaction, so they reduce human error,” Hooper says. “These smart contracts potentially can remove the ambiguity of ownership, recording a perfect record of who owns what.”

As property records are coded in blockchain, title searches will be accessible to the public and include verified data. Due diligence is more effective, reliable, and quick, according to Gregory M. Karch, partner and founder of WorldBlock Legal in Tampa, Fla.

Finally, blockchain can transfer assets in the form of cryptocurrency online, eliminating the need for escrow. It also will change how payments can be processed and allow for easier cross-border and international commercial property deals.

“Blockchain can create one global currency; all of a sudden, no one has to worry about the different currency rates,” Kerch says. “It will be so much more effective to use blockchain than our current system, plus it's auditable. Even the foreclosure process will be more effective on blockchain.”

For brokers, closing a transaction will be much easier, with less friction and less low-margin work with clients and other stakeholders. “Brokers will become increasingly valuable as advisers,” Weikal says. “As transparency goes up, the velocity of transactions speeds up. Brokers can close more transactions than ever before because each one is so much faster.”

Challenges Ahead

Blockchain will be challenging an established system that stakeholders understand. While it's comparatively inefficient, the current infrastructure is immense.

“We know the current system's flaws and love complaining about it, but it is familiar to multiple people involved in commercial real estate transactions, from brokers to lenders to attorneys,” Weikal says.

Another obstacle is the perception of blockchain as being synonymous with bitcoin and other cryptocurrencies. “That's a PR problem,” according to Weikal. “The recent hacks of digital currency are not about the underlying technology of blockchain, which is secure.”

A third hurdle is that technology such as blockchain and artificial intelligence is happening so quickly that regulators cannot keep up. As a result, regulatory agencies are reacting rather than being proactive, according to Weikal.

Will clients slow down the acceptance of blockchain? “I foresee a lack of trust from non-tech-savvy clients that prefer the traditional, person-to-person relationship aspect of commercial real estate transactions,” says Esteban Flores, CCIM, commercial director at Icon Realty in McAllen, Texas. “There will be a transitional period and learning curve before it becomes the norm in our industry.”

Another development is that the largest banks have been considering what blockchain means for commercial real estate and what standards to set. “The banking industry is three or four years ahead of the commercial real estate industry on blockchain implementation and its ramifications,” Weikal says. “We need to get ahead of it. Otherwise, financial institutions may impose their standards on us.”

Bright Future

Commercial real estate professionals need to look ahead and begin creating new career paths within the new blockchain ecosystem, according to Camille Renshaw, CCIM, co-founder of Brokers+Engineers in New York City. The probable disruption in related commercial real estate industries makes change inevitable, and commercial real estate professionals should consider how to retain their position as advisers to their clients.

Through blockchain, brokers will have more data and still retain their knowledge of how to connect clients with the right properties. The combination of data analytics, AI, and blockchain gives brokers greater reach and more ability to find properties more quickly for those clients using Section 1031 exchanges and other investment tools, according to Renshaw.

“Using blockchain is like a business card in which you connect with your clients in three dimensions,” Renshaw says. “Look at the edges for new investment opportunities. Even as a traditional net lease brokerage business, B+E is able to leverage blockchain and AI to give us greater reach that can be used more intelligently for marketing and sales.”

The link to demographic behavior through these tools can open new marketing avenues for brokers. For an example in another industry, Harley-Davidson is using AI to learn new information about who buys and who buys again, and then using blockchain to connect those clients with their desires.

By applying that technique to commercial real estate, brokers can discover more clients who buy and buy again in order to connect them to the right property investments. “Blockchain allows us to work on the accessibility versus the execution of running our marketplace,” Hooper says. “How blockchain will change the day-to-day of commercial real estate professionals depends on the business they touch, which is often more than one aspect of the industry.”

New Source of Capital

by Sara S. Patterson

Cryptocurrencies are beginning to be used as capital for commercial real estate properties. “As cryptocurrencies gain more mainstream acceptance, I see the capital aspect of blockchain growing as a form of payment for transactions,” says Samantha Ahuja, partner at Morris Manning & Martin in Washington, D.C.

Using cryptocurrency for paying leases is just the beginning. For example, Daren Hebold, CCIM, manages a parking garage with 600 people leasing parking spaces. As a pilot program, he likely will offer a discount incentive to parkers who pledge payments through the smart contract and their crypto wallet.

“Leases like this need a highly automated way to pay, which is perfect for cryptocurrency application,” says Hebold, president of LUX companies and managing director of LUXOLO Financial in Portland, Maine. “In time, people will adapt.”

He is retooling his brokerage firm to work with cryptocurrency. “I am totally convinced that private industry will issue cryptocurrency rather than governments,” Hebold says.

Some commercial real estate sectors may adapt more quickly to the blockchain revolution. In hospitality, Ahuja sees blockchain being used for guests’ personal identification, which can include personal room preferences, meal choices, and loyalty programs.

“Blockchain permits very detailed recordkeeping that’s secure, allowing hotels to know their customers better,” Ahuja says. “While it’s still in its infancy, my hope is that blockchain will create more avenues and make payments and other processes more secure. Of course, blockchain cannot solve everything, but hopefully it will further minimize hacking, such as what we see happening with large companies holding our personal data.”

In other applications, Cook County in Illinois is using blockchain to gain efficiency for property titles, while the city government in South Burlington, Vt., is partnering with the blockchain startup Propy to store land record management data. This pilot program’s goal is to develop a more efficient, secure ledger for real estate transactions.

Whether governments or private industry develop blockchain uses first, its implementation is coming. Commercial real estate professionals need to be ready to participate in the blockchain revolution.

“I recommend firms that have interest in establishing and using blockchain technology do not pursue it in a vacuum,” Hebold says. “That is not how this decentralized technology is being developed. Instead, join efforts with the thriving development community where ideas and concepts are quickly hashed out through the collective intelligence and experience of the developer community.”

Continue Reading

Sara S. Patterson

Sara S. Patterson is former executive editor of Commercial Investment Real Estate.

Advertise with Us

Reach more than 45,000 top-performing commercial real estate professionals with CIRE magazine’s print, podcast, and online offerings.

Download the Media Kit

CIRE July/August 2018