17th Jun 2022

Land Further

Commercial Real Estate Industry, Meet the Metaverse

Virtual Real Estate Frontier, Meet Architects, ‘Land’ Developers and High-Risk, High-Reward Markets

An avatar with shops and arenas in the background, in the metaverse world called Decentraland. (CoStar)
An avatar with shops and arenas in the background, in the metaverse world called Decentraland. (CoStar)

If you’re buying or leasing real estate, concerned with the bricks that sit firmly in a very tangible patch of dirt, location is supreme.

Pixels' worth of virtual "space" in a digital world mean nothing to a broker or portfolio manager, so you’re understandably skeptical of the metaverse.

But while it's easy to be indifferent or even dismissive of the metaverse and the associated concept of "virtual real estate," shrewd investors everywhere are clamoring to know why some of the biggest brands, banks and organizations are spending millions to snatch it up.

So LoopNet, hoping to deliver some answers in this three-part series, began asking some of the same questions they are, and that you probably should be too if you're not already, starting with:

What is the Metaverse?

Metaverse is simply the term for a concept that envisions a more fully immersive version of the internet.

The metaverse currently is realized mainly through various blockchain platforms represented as their own virtual, three-dimensional online “worlds” that mimic the real world, which users can visit and interact with, represented as an avatar, either in first- or third-person view — similar to a video game.

Decentraland, The Sandbox and Somnium Space, which can all be accessed by anyone with an internet browser, currently lead the pack in terms of users and media attention over thousands of these siloed “metaverse worlds.”

As of today, most of these virtual worlds are disjointed, primitive and slow, but proponents promise that some will eventually be as seamless and graphically stunning as today’s most high-octane video games. Increased development of virtual reality modeling will enable and encourage a greater degree of users’ sensory immersion in them, through the use of VR headsets or more streamlined wearables like glasses.

But thinking of these metaverse worlds only in terms of pixels, internet browsers and video games diminishes the utility of their underlying economies, including their real estate-like markets.

What is Virtual Real Estate?

Virtual real estate is the digital space, pixel by pixel (or 3D pixels called voxels, in this case) that are divided up and traded in metaverse worlds like Decentraland and The Sandbox.

Using open-source blockchain technology, most of these metaverse worlds are decentralized and democratized — meaning they are built and governed by those who use them. In most cases, they were started as big blank 3D slates divvied up into intentionally scarce parcels of virtual “land” by nonprofit groups of community-focused blockchain developers called DAOs, or decentralized autonomous organizations.

No central authority or company controls the worlds; they are the sum of all users’ parts, which are assets that can be traded on the open market, similar to physical real estate.

Within these ecosystems, any user can create and monetize all sorts of digital fare and interactive games for consumers, build a place to simply hangout, or even establish professional virtual offices for their businesses.

Owning or leasing land in these worlds is necessary to create virtual destinations that users would want to visit. And an innumerable array of stakeholders — ranging from Autodesk to Walmart, alongside any average Joe — have announced plans to do just that.

But with the infrastructure that supports these endeavors being intentionally limited to create value in this new frontier, the equivalent of architects, developers, appraisers and even brokers are emerging to serve as shepherds to its settlers.

“Whatever you want to build in the metaverse — whether it’s a store, an office, a game, a casino, or a stage for virtual concerts — you have to have the land,” metaverse land developer TerraZero Technologies’ CEO Dan Reitzik told LoopNet.

Said to be one of the largest holders of virtual real estate in Decentraland, with more than 200 parcels collectively valued at well over $3 million, TerraZero also offers mortgages for metaverse entrepreneurs, and was behind Miller Lite’s Super Bowl marketing campaign that included a virtual bar in the metaverse.

"Meta Lite," an interactive, virtual representation of a bar in the metaverse, funded by Miller Lite. (Terra Zero)

Of course, someone or some company — such as Meta (formerly Facebook) — could be a centralized god of a separate metaverse world that they create and add to as they please. But as of now, that “wouldn’t be worth investing in,” according to Reitzik. “You want to invest in a metaverse world that only has a finite amount of land, and therefore should be deflationary and should increase in price over time.”

Decentraland, for example, is made up of exactly 90,601 parcels representing the equivalent of around 2,700 square feet each. When minted in 2017, parcels could be snagged at auction for around $20. Booming interest in various metaverse worlds has since seen some of those same plots trading for millions.

While the average price for a parcel of land across the main metaverse worlds has beenhovering around $15,000, units of land in the similarly-valued world, The Sandbox, for instance, have changed hands for north of $4 million.

But how is this virtual real estate business conducted, exactly?

How Do You Buy Virtual Real Estate?

Aprimer on DAOs, blockchains, cryptocurrencies and non-fungible tokens (NFTs)— or the collective components of a more autonomous system for the internet known as “web3” — is an apt place to start if any of those terms cause indigestion, because these are the vehicles by which all virtual real estate is traded.

Luckily, a thorough understanding of all things web3 isn’t strictly necessary to get started trading virtual real estate. On the front end, the user experience of purchasing a virtual real asset is as simple as going to one of these metaverse worlds’ websites and buying or bidding on it with a few clicks.

Some popular NFT marketplaces like OpenSea also facilitate listings and transactions across multiple worlds. A marketplace like LoopNet could even theoretically list virtual real estate properties across various metaverse worlds one day, sources said.

If the price is right, the dollar equivalent of that offer — made in the relative value of the world’s cryptocurrency of choice — can be transferred through a crypto “wallet” such as Coinbase, or a crypto intermediary like PayPal.

The transaction then takes place on the blockchain. What might start as $20 of cold hard cash in a PayPal account, for instance, would be converted to the equivalent of Decentraland’s “Mana” cryptocurrency token, which lives on the widely used Ethereum blockchain and goes up and down in value relative to the dollar based on its own market forces. The investment is not just in the land, but in the associated cryptocurrency.

At a rate of .41 Mana to the dollar on April 7, for instance, the transaction would entail 8.3 Mana worth of cryptographically distinct and noninterchangeable units of that currency, representing a verifiable digital certificate of ownership, being transferred and etched forever into the immutable Ethereum blockchain. This NFT package is the digital deed that ties the property rights of what was purchased to the anonymous details of its purchaser.

You then almost instantaneously own the virtual real estate asset and have voting rights as part of that world’s democracy.

So, then what?

Do you “develop” your slice of the metaverse? Become a digital landlord and make rental income? Sit on the land until it’s surely scouted as the next location for a CVS Health metaverse branch?

Before doing anything with virtual real estate, it’s crucial to look at who is already playing in the proverbial sandbox of metaverse worlds like Sandbox, and why.

Who is Buying Virtual Real Estate?

The loudest use of the metaverse, in its current form, comes from brands marketing and selling things, through the mechanism of NFTs, to millennials and Gen Z consumers — with digital billboards, interactive games and virtual stores. Others are clearly using the novelty of it to make a splash that attracts media coverage, sources indicated. Many are simply experimenting.

A small, random sample of high-profile tenants of the metaverse includes everyone from Liverpool FC, which has been selling digital art on Sotheby International’s virtual auction palace; to the largest bank in the U.S., JPMorgan Chase, which created a virtual lounge to help herald its play in digital currency; to Vice Media, which had renowned modernist architect Bjarke Ingels design a virtual home base from which its international staff could explore the metaverse.

Some real-life real estate brokers are also partnering with metaverse developers and 3D modelers to create “digital twins” of brick-and-mortar buildings they’re trying to sell in real life (IRL) so that they can be toured virtually.

Education, work meetings and conferences can be held in the metaverse world Virbela. (eXp Realty)

Virtual real estate, at this point, can essentially be boiled down to three main uses:

  • Retail, Marketing and Entertainment
  • Workplaces, Productivity and Conferences
  • Digital Twins and Virtual Tours

If the metaverse is like a massive virtual sandbox, the sand metaphor is apt, sources said, because the value of any particular metaverse world could simply wash away if users stop caring about it in favor of another.

But that’s not stopping corporations, brands, high-profile individuals and entertainment entities from investing millions of dollars to build proverbial sandcastles in the metaverse, which sometimes involves hiring metaverse consultants to help them scout the right location in the right world, filing trademark patents to stake their claim, and paying 3D modelers and sometimes even licensed architects to develop virtual buildings for them.

Meanwhile, droves of naysayers are scoffing at the idea of the metaverse being a worthwhile investment, and the jury’s still out. But with effusive parallels to the commercial real estate industry, and so much capital continuing to change hands for the likes of land, floorplans, mortgages and location scouting, the biggest risk for the real estate industry might come in the form of indifference.

Up next in this three-part series, we’ll continue to wade intowhat virtual real estate is — and isn’tand try to understand whether to expect any real threats to brick and mortar. In part three, we'll unveilsome of the opportunities investors will want to keep in mind. All along, we'll be wary that some people might get lost in the metaverse, while others will be pioneers. It may be you, your clients, or your competitors.