Real Estate in the Metaverse: What Is Digital Real Estate? Why Does It Matter?
In this article, we will provide (i) a brief background on what the metaverse is, and (ii) an overview of why the commercial real estate industry should take notice. Because of the evolving nature of real estate in the metaverse, ArentFox Schiff will continue to monitor this matter and publish related alerts.
What Is the Metaverse?
There are multiple metaverses. Some are built on blockchains (“onchain”), while others are built “offchain” in traditional video game environments. The common thread is that all are persistent, virtual environments where users can interact with each other in a three-dimensional world, attend dynamic, real-time events and purchase digital goods similar to in-app purchases. In onchain metaverses, digital real estate may be purchased with cryptocurrency on any of the various metaverse platforms; however, the current market is saturated in the primary platforms, including The Sandbox, Decentraland, Cryptovoxels and Somnium. As of today, roughly 95% of all virtual real estate sales in the metaverse are happening in either in The Sandbox or Decentraland.
Each metaverse platform is made up of codes that are subdivided into a limited number of plots, similar to longitudes and latitudes on a map. After a plot is sold, the purchaser’s information is recorded in a non-fungible token (“NFT”) that is coded onto a public blockchain. This code serves as a unique identifier and provides a secure chain of title. In other words, the purchase of an NFT and the related blockchain function similarly to a deed and the associated chain of title in a typical real estate transaction.
Why Should the Commercial Real Estate Industry Take Notice?
Ownership in the metaverse is essentially absolute, and owners can develop, lease, sell, or otherwise use their virtual real estate as they wish. Owners of digital properties can construct office buildings, operate store fronts, lease property for events and erect billboards for advertising.
With the demand and prices of land in the metaverse increasing, financing for virtual real estate has also begun. In January 2022, TerraZero Technologies provided one of the first “mortgage” loans for the purchase of virtual real estate in the metaverse. TerraZero first evaluated the borrower’s business plan to profit on the virtual real estate before purchasing the land on the borrower’s behalf, which it held title to until the loan was repaid and the NFT was transferred to the borrower.
So far, the largest digital real estate transactions in the metaverse have been purchased by crypto-based investment companies. Everyrealm (formerly Republic Realm) purchased 792 parcels of digital real estate in The Sandbox for $4.3 Million and plans to develop some of the land with the gaming company Atari. Tokens.com made a $2.4 Million purchase in Decentraland, which it plans to develop for fashion events and retail purposes.
Large players in the traditional real estate market are also taking notice. This year, J.P. Morgan Chase advertised its entrance into the metaverse by opening a lounge in Decentraland, complete with a tiger and a portrait of Jamie Dimon. HSBC purchased digital real estate in The Sandbox, which is expected to be developed into a stadium to host virtual sporting events. Our firm, ArentFox Schiff, as well as other notable companies, such as Adidas, Gap, Hulu, PricewaterhouseCoopers, Nike, and Verizon, are also snatching up digital properties.
As consumers and businesses adopt the metaverse, advertising spending is expected to follow. J.P. Morgan Chase and Grayscale, a large investment firm, expect the Metaverse to yield $1 Trillion in annual revenues in the coming years. Many of the world’s largest companies believe this growth will be inevitable as the metaverse and the blockchain technology behind it are better understood, similar to the rapid growth experienced by today’s social media behemoths and search engine giants. Accordingly, many investors believe the price of digital real estate will rapidly appreciate in the near term as the increasing user base diminishes the limited supply of digital land, and digital landowners capitalize on advertising dollars.