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Cryptocurrency And The Blockchain Could Revolutionize CRE. So Why Aren't We Using It?

Blockchain-fueled investments promise to dramatically transform the commercial real estate market landscape, and stakeholders are starting to take notice.

Blockchain technology unfreezes real estate equity, making it a more feasible investment option for those who need more liquidity in their portfolio. Much of its new technology is just beginning to break on to the real estate investment scene, where it could completely transform the way real estate is traded ⁠— and open the door for many who were previously locked out of the market.

This project, which consists of seven townhomes in Seattle, is one of iCap's investments.

Harbor is a blockchain tokenization platform that uses blockchain technology to record ownership, embedding compliance into the system, Harbor CEO Josh Stein said.

It could be an ideal platform for fundraising CRE.

“If you are raising funds from more than 10 or 20 people it becomes a logistical nightmare,” Stein said. “We onboard and vet the investors, making it a very smooth and easy process.”

Stein compares blockchain in commercial real estate investing to email in communications. Prior to email, people would send letters through “snail mail” and spend money on stamps, Stein said. With blockchain, everything is digitized and there is only one set of records. It’s a distributed ledger so everyone knows who touched it.

“It’s like Google Docs,” he said. “We are all working off the same document and everyone can see what everyone else did.” 

Bellevue, Washington-based iCap Equity is wading out onto that bleeding edge of change. Its new technology allows for shorter investment time frames and lower entry-level investments, two changes that iCap has long championed.

“We’ve been searching for years for a way to create a more liquid asset that still holds the value that real estate offers,” iCap CEO Chris Christiansen said.

Now, the firm leverages startup Harbor’s blockchain-enabled assets platform to enhance liquidity. Thanks to the new platform, iCap’s investors can now buy and sell securities with each other. ICap specializes in small to midsized real estate investment projects that range from less than $5M up to $25M in the Seattle and Portland markets.

This eliminates the typical three- to five-year illiquidity period that vexes many investors, Christensen said. 

“Invariably what happens is in that three- to five-year period someone would need to get out,” he said. “We’d would try to accommodate them, but we didn’t have a tool to do it.”

Blockchain technology became synonymous with the cryptocurrency bitcoin, which sometimes spooks investors. The bitcoin market grew rapidly in 2017, then lost much of its value. As of Oct. 21, 2019, one bitcoin equaled $8,198.27 U.S., according to coinbase.

But bitcoin and blockchain are apples and oranges. 

Bitcoin is a cryptocurrency that is made possible through blockchain technology. Blockchain is a shared ledger that allows everyone to see what everyone else has done throughout a transaction. 

Proponents say the brilliance of blockchain tokenization in commercial real estate investing is that it embeds compliance into the system. Previously, commercial real estate investments have been out of reach to lower dollar investors and foreign investors because there are so many rules.

Harbor’s Marketing and Communications Manager Kevin Young compares the relationship between the two to an application on the internet: blockchain is the internet, bitcoin is the app. 

Yet there are still few examples of it in the commercial real estate industry.

The St. Regis Aspen resort is one property that uses it, and was featured last year in a Bisnow article. Meridio, a Brooklyn, New York-based company, also used blockchain technology to give its eight investors cryptocurrency tokens to represent their ownership shares in its 304 Troutman St., Brooklyn, apartment building. Those shares can be traded with other approved investors.

Last year, Harbor and Convexity Properties announced plans to tokenize a REIT offering at The Hub at Columbia, an off-campus student housing high-rise near the University of South Carolina that represented $20M in private equity. Ultimately, that plan didn’t pan out. But it set the stage for more opportunities, such as the one with iCap.

Now, iCap is one of the first investment firms in the country to take advantage of this technology — and Christensen is sure that the trend will only deepen.

“I can see a lot of companies heading in this direction, but the question is: How quickly?” he said. “The technology is ready. The concepts are ready. We have our own mini-market which will be a perfect proving ground.”

Some residential real estate buyers now use bitcoin currency for purchases. For example, Grove Resort & Water Park will accept bitcoin for purchases for its condos through the application BitPay, according to coindesk. There are 400 residential properties for sale on the site, according to The Mercury-News. Accepting cryptocurrency for real estate opens the market to many who were previously locked out, including international buyers.

So far, few CRE transactions using cryptocurrency have taken place.

“We are seeing cryptocurrency transactions. In fact we recently had one with an international buyer," New York-based Marcus & Millichap Executive Managing Director of Investments Peter Von Der Ahe said. "However, fiat currencies are still king, and I don’t see that changing anytime soon in commercial real estate investments. The dollar is still efficient for investors."

Blockchain's main importance in the commercial real estate industry is that it opens the market up to more such investors. Firms, and the banks that back them, are just recently beginning to see the practical uses of blockchain and are starting to implement them.

A survey by Deloitte finds a similar trend. Firms are slow to adopt the changes, but the firm's survey results show 53% of respondents say blockchain technology has become a top priority for them, which is a 10% increase over last year.

With a lot of players waiting in the wings, Christensen expects that soon this technology will be prevalent in the industry. 

“When they see the success and the flexibility blockchain technology provides, it’s going to go fast,” he said. “We are committed to be at the forefront to continue our strategy of giving more people access to real estate investing.”