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Blockchain for CRE: Future Promise vs. Current Reality

Blockchain technology is largely shrouded in hype and obscured by hyperbole. Like many groundbreaking innovations, the promise of blockchain has far outpaced the practical development. It is important to understand how blockchain is being applied to the real estate market today, and how those applications are expected to mature in the future. To help cut through the haze, we offer below an overview of the current state and future promise of one of the most impactful blockchain real estate applications, real estate tokenization.

Tokenization is a catch-all term that can be applied to nearly any aspect of the blockchain industry. In this article, we will use the term “tokenization” to refer to tokenized securities. Tokenization can be simply thought of as a form of securitization, selling fractional interests using blockchain-based capital markets for liquidity instead of traditional markets such as the NYSE. This was pioneered by a trio of venture capital firms: Blockchain Capital, Science Blockchain and SPiCE VC. Each company raised capital by tokenizing their funds: either entire LP equity positions or future cash flows from investments. This process revealed benefits in liquidity, investor management and transactional efficiency that can be applied to real estate.

LIQUIDITY
Future Promise:
By tokenizing an asset, the issuer gains access to an expanded pool of liquidity. Instead of being limited to the regional investors and the 9:30 AM – 4 PM trading hours of a traditional exchange, tokens trade freely across borders and at all hours of the day. This global pool of investors and round-the-clock order book will unlock additional liquidity premiums and pricing efficiency. Each of the VC fund pioneers were able to raise over $10 million for their funds, indicating positive investor demand in a nascent market.

Current Reality: There have only been one or two tokenized real estate offerings, which have not yet generated the same demand as the VC offerings. The return profile of real estate is radically different than the returns offered by blockchain companies or the VC funds that invest in them. Entreaties about the risk-adjusted returns and long-term stability of real estate vs. crypto have fallen on deaf ears. This is partly because blockchain capital markets mainly provide access to global liquidity from retail investors, who generally do not understand the benefits of diversification or risk-adjusted returns as well as institutional investors. Retail liquidity also pales in comparison to that offered by institutional investors, who so far have been barred from the market by a lack of custody, insurance, and sophisticated products.

There are many companies working on these solutions, and institutional interest from the sidelines has been extensive. Tokenization platforms like Slice RE have further prepared for the entrance of institutional investors, by tokenizing popular institutional investments like LP equity positions in commercial real estate.

INVESTOR MANAGEMENT
Future Promise:
Blockchains are basically just ledgers, keeping track of who holds what token at any time. By layering on security token protocols (aka smart contracts), an issuer can automate compliance with regulations, operating agreements, PPMs and lender requirements. Lenders do not have to rely on a borrower’s good faith to inform them of changes in the capital stack. Programmable securities can automate the process of dividend payments and create software interfaces for the execution of equity rights.

Current Reality: Lenders are concerned about the commitment of small investors in highly fractionalized cap tables, and don’t yet understand the compliance benefits of smart contracts. Therefore, obtaining leverage on tokenized capital structures can be difficult. Smart contracts are new software and have suffered failures in the past as pioneers have iterated best practices. Securitize, Harbor and Polymath are leaders in the creation of secure, compliant security token protocols. They have taken up the mantle of educating institutional investors and lenders on the benefits of tokenized investment structures.

TRANSACTIONAL EFFICIENCY
Future Promise:
The title to a property can be vested in a single token, reducing transactions from complex multi-party processes to a simple transfer between buyer and seller. The token’s history is publicly auditable, simplifying the title research and insurance process. Such a token can be placed into a smart contract wallet that acts as an autonomous escrow, holding the seller’s property token and the buyer and lender’s cryptocurrency proceeds in escrow until all parties assent to the exchange.

Current Reality: The real estate market is just starting to experiment with cryptocurrency transactions, with no more than a couple dozen deals completed, mostly in the residential space. Startups tackling transactional efficiency include HouseHodl, Velox.Re and Propy. This vertical will probably continue to see sluggish adoption as it requires the acceptance of institutions and the general public. Institutions will likely continue to experiment with blockchain for back-office use cases before getting comfortable enough to roll out public-facing blockchain software. Until institutional adoption and introduction, the general public is unlikely to adopt the technology on a large scale.

CONCLUSION
Informed, rational investors should continue to be wary of startups that promise massive disruption on short timeframes. This can be difficult in a highly volatile market, where newly-announced ventures raise tens of millions in a heartbeat from eager investors foaming (or fomo-ing) at the mouth to get in on the next big winner. Nonetheless, the achievements and progress of the pioneering startups noted in this article are laying the groundwork for new, efficient, automated, and global capital markets within the next decade. Each successful implementation eases the path for further innovation and adoption, accelerating the rate of change. Every real estate professional should keep abreast of this developing technology, or risk being left behind when it explodes into the mainstream.

Henry Elder, Director of Origination & Investment, Slice
Henry Elder (@Henry_Elder ) is the Director of Origination & Investment for Slice, a real estate tokenization platform. He has participated in over $1 billion of debt and equity investments across real estate and tech. He also speaks internationally on topics such as asset tokenization, cryptoasset valuation, and tokenomic design.

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Realcomm News

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UPCOMING REALCOMM WEBINARS

Controlling a Building from Your Phone – OCCUPANT EXPERIENCE Platforms Arrive - 2/28/2019

The initial focus in mobile technologies was on meeting room reservations; then came lighting, heating and cooling, then access control. Over the last 24 months it has become apparent that there are many more occupant experiences that can be delivered via mobile phone. Managing parking, reporting maintenance issues, ordering coffee, scheduling an exercise class, viewing security cameras, and other applications were quickly added to the list. With so many options and approaches available, what are the best strategies for occupant experience? Build versus buy, functionality selection, solution integration and ongoing support are just some of the topics to be addressed by the industries’ most respected professionals.

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Chuck Niswonger NiceNets Consulting
Chuck Niswonger President Chuck Niswonger has over 30 years of successful leadership experience in technology-related roles that range from operating his own consulting company
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Chuck Niswonger
President
NiceNets Consulting

Chuck Niswonger has over 30 years of successful leadership experience in technology-related roles that range from operating his own consulting company (www.nicenets.com) to directing the IT strategy of a real estate investment management firm to manufacturing and technology-enabled education. Chuck has also been the chair of the Realcomm Investment Management (IM) Advisory Council for the last ten years, managing content selection for the conference educational sessions, IM forums, workshops and webinars.

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Matthew Lennan Oxford Properties
Matthew Lennan Innovator in Residence Matthew Lennan has been integrating IT and building system technologies for more than 30 years. He has developed and implemented computing infrastruc
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Matthew Lennan
Innovator in Residence
Oxford Properties

Matthew Lennan has been integrating IT and building system technologies for more than 30 years. He has developed and implemented computing infrastructures for global financial firms, major healthcare facilities, manufacturing, entertainment complexes and traditional smart buildings. Most recently, Matthew has been working in software development to refine the customer experience for smart buildings in Office, Retail and Residential environments. He is currently responsible for driving Innovation across Oxford Properties’ portfolio.

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Jared Summers ExxonMobil
Jared Summers Data, Analytics & Technology Manager Jared Summers is a motivated execution-oriented high performance individual who has extensive experience managing large-scale global programs. He brin
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Jared Summers
Data, Analytics & Technology Manager
ExxonMobil
LinkedIn

Jared Summers is a motivated execution-oriented high performance individual who has extensive experience managing large-scale global programs. He brings a unique ability to understand and articulate complex technologies in a relatable way while rapidly fielding innovative capabilities. Currently Jared is the Data, Analytics & Technology Manager at ExxonMobil, delivering on the promise of transformational change enabled by digital technologies across the entire global real estate portfolio.

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Joshua Grosser ButterflyMX
Joshua Grosser Vice President - Commercial Sales Joshua has over 15 years of successful leadership experience with early-stage disruptive companies. He has an extensive background in property technol
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Joshua Grosser
Vice President - Commercial Sales
ButterflyMX

Joshua has over 15 years of successful leadership experience with early-stage disruptive companies. He has an extensive background in property technology, focusing on amenities that drive tenant experience across commercial real estate, multifamily residential and student housing. Josh has lead national sales and support teams with an emphasis on customer success, brand recognition, and occupant experience.

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Elizabeth Dukes iOFFICE
Elizabeth Dukes Co-Founder & CMO Elizabeth Dukes is the Co-Founder and CMO of iOFFICE, the leading workforce-centric IWMS software and the first 100% SaaS platform designed for the Di
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Elizabeth Dukes
Co-Founder & CMO
iOFFICE

Elizabeth Dukes is the Co-Founder and CMO of iOFFICE, the leading workforce-centric IWMS software and the first 100% SaaS platform designed for the Digital Workplace. Dukes drives strategy for iOFFICE and advocates for the confluence of people and technology that unleashes the full potential of the workforce and the workplace.

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Nicholas Lawrence cohesionIB
Nicholas Lawrence Head of Sales As Head of Sales, Nick is responsible for leading the sales organization including domestic sales, product implementation and customer success. Nick’s
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Nicholas Lawrence
Head of Sales
cohesionIB

As Head of Sales, Nick is responsible for leading the sales organization including domestic sales, product implementation and customer success. Nick’s 20+ years’ involvement with technology dates to the 90s when Peapod did its best to teach him UNIX. Nick’s IT responsibilities over his various positions have included End User Support, System/Platform Administration, Business Continuity Management and Project, Facilities, Procurement, Contracts & Maintenance. Most recently Nick served as Vice President at Environmental Systems Design (ESD).

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Matt Willmore Modo Labs
Matt Willmore Director of Product Management Matt leads the product development and roadmap strategy for Modo Labs. With broad experience across mobile and audience engagement, along with a custo
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Matt Willmore
Director of Product Management
Modo Labs

Matt leads the product development and roadmap strategy for Modo Labs. With broad experience across mobile and audience engagement, along with a customer-centric mindset, he is the company’s product leader for both Workplace and Campus solutions. Matt and his development team continue to enhance the Modo no-code platform, empowering higher education and enterprise organizations to quickly create personalized applications and ensure students and employees have access to the information they need most.