Is the Metaverse taking the Real out of Real Estate?
What is the Metaverse?
The phrase “Metaverse” first entered the American lexicon in the early ‘90s when author Neal Stephenson used the term in his science fiction novel, Snow Crash. More recently, venture capital Investor and former Global Head of Strategy for Amazon Studios Matthew Ball popularized the phrase “Metaverse” in a series of essays that focused on the present and future of Epic Games. These visionaries introduced a set of themes in which Investors could envision elements of the industry shifting from Web 2.0 to Web 3.0. [1]
Web 1.0: The browser (i.e., Netscape) – Connected people online
Web 2.0: social media (i.e., Facebook) - Connected people into online communities
Web 3.0: Connected people into a community-owned virtual world
In March 2021, the Metaverse gained mainstream attention following the listing of Roblox and the change in the name of Facebook to Meta Platforms. Shortly after the public listing of Roblox, Google saw an increase in Metaverse search queries during the Q3 2021 earnings season. The increase was driven by management teams of public companies discussing elements of their business within the future of the Metaverse. [1]
Source: Google. Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term.
There is not a single Metaverse but many, including Decentraland, Somnium, The Sandbox and Upland. Although the Metaverse can be explained as a virtual world where users can play games, socialize, work, attend events and more, it is best to define the Metaverse by its key characteristics: [2]
Interoperability - Digital assets and information can be interchanged throughout a variety of digital worlds and environments
Content/Experience Hosting – The Metaverse can display information, experiences and continuously available content to users. Users engage with content, experiences and activities more broadly via their digital avatars, each with its own attributes and properties
Unconstrained Size – The Metaverse can host audiences and groups of virtually any size, unconstrained by bandwidth and other traditional limiting factors
Constant availability – Metaverse worlds and digital assets are constantly available to all users. A user logging off does not equate with the digital world being shut off
Multi-Device Accessibility – The Metaverse is accessible through various devices and internet service providers (ISP), similar to traditional websites like Facebook, YouTube and Google
Translatability – The Metaverse encompasses a functional economy that allows users to buy and sell various goods and services. The transactional functionality of the Metaverse will likely expand over time with an increasing number of goods and service providers entering the space
Investment in virtual real estate occurs by purchasing and exchanging nonfungible tokens (NFTs), a particular cryptographic token representing something unique and not mutually interchangeable. In contrast to cryptocurrencies, like Bitcoin, that are fungible, each NFT is distinct; it is indivisible and is not interchangeable
Multiplatform – The Metaverse consists of a network of different platforms, applications and digital worlds
Governance – Implementations vary from centrally managed/planned to centrally governed by democratic election processes and similar mechanisms. The Metaverse itself is not necessarily owned/managed, much like the totality of the internet in modern times
In 2019, Jamestown, a design-focused real estate investment and management company, launched its effort in the digital asset space with Virtual New Year’s Eve, a dedicated app and website that brought the year-end celebration at One Times Square into the virtual world. In December 2021, Jamestown partnered with Digital Currency Group and recreated One Times Square in the Decentraland metaverse, a leading decentralized platform. “The future of real estate is the thoughtful integration of the virtual and physical worlds, optimized for user experience,” said Michael Phillips, President of Jamestown. “The metaverse is an important part of the evolution of real estate and the built environment. Whereas physical real estate is largely limited to people with geographic proximity, the metaverse can give people around the world meaningful access to places through immersive virtual experiences. Recreating One Times Square in the Decentraland metaverse is part of a larger digital asset strategy to evolve and enhance our physical real estate for Web 3.0 and open new pathways for our assets to exist in multiple metaverses in the future.”
Monetization and Use Cases
The driving force behind the Metaverse was accelerated by recent consumer trends in gaming, entertainment and productivity caused by the COVID-19 pandemic. Prior to the pandemic, video games blurred the lines between virtual and physical events and activities, with in-game events hosted in Fortnite and Roblox (Star Wars: The Rise of Skywalker, DJ Marshmallow concert, Weezer album debut). As a result, gaming franchises saw their userbase grow with increased levels of engagement, consumption and ultimately monetization. According to a survey [1] conducted by Newzoo, consumers view the ability to choose their avatar’s physical appearance as a key feature in driving overall enjoyment within the Metaverse, followed by free content funded by advertisers and sponsors and the ability to create content for other players. Roblox has been investing in these elements to enhance the users’ virtual experience. [1]
Source: Newzoo, Data compiled by Goldman Sachs Investment Research
The COVID-19 social restrictions catalyzed the need for virtual events and connections, resulting in a broader social acceptance of virtual existence. As life events such as graduation ceremonies and weddings were canceled, video games, streaming platforms and communication applications allowed people to connect via platforms such as Minecraft and Roblox. As the world begins to move on from the COVID-19 pandemic, we see platforms invest in a greater sense of presence and individuality, further blurring the lines between virtual and physical existence. [2]
As the Metaverse gains popularity, management teams have begun discussing how it can be adapted for enterprise applications. Companies are building hyper-realistic, physically accurate, digital twins that simulate natural environments, physical structures, industrial operations and transportation networks. Additionally, learning adaptations such as employee onboarding, training and applications could replace a traditional classroom environment. Deloitte has created Deloitte University, an immersive space where Deloitte colleagues worldwide can connect and collaborate. Additionally, Deloitte has hosted more than 50 virtual events for 4000+ attendees from 15 countries who experienced a virtual onboarding in its Metaverse, “Deloitte University.” [3]
Decentraland: Real Estate Fundamentals
When first hearing about Metaverse real estate, we immediately contemplated whether the fundamentals that drive real estate value (scarcity, location, ownership, people, currency) would apply in the Metaverse. We will explore Decentraland’s real estate as a case study in the next section.
First, all space (LAND) within Decentraland can be acquired, sold and developed by users within Decentraland, except for public infrastructure. The Ethereum blockchain maintains ownership documentation, making titles easily transferable and verifiable against fraud. Moreover, landowners have complete discretion on what is built on their land. [2]
As of March 2021, the average LAND parcel within Decentraland sold for 6,900 MANA (Decentraland’s fungible token) or $5,800. [2]
Reflective of the natural world, virtual LAND or real estate within Decentraland is scarce, with a ceiling of 90,000 parcels, fundamentally increasing LAND values. As more brands and commercial interests enter Decentraland to increase consumer and user engagement, it’s likely that scarce digital real estate within Decentraland will continue to increase in value. (LAND sold for $500 in 2019 is now trading at over $7,860, an increase of 1,472%). [2]
Location plays an outsized role in Decentraland property values. Property or land closer to Genesis Plaza, the Decentraland entrance, and other popular districts typically costs more than property or land in other locations on the platform. Additionally, property or land close to a crossroads is typically worth more than those farther away. [2]
When users have acquired multiple parcels of land, they have acquired an “estate.” Owners of an estate have the right to construct larger developments that can be rented to virtual tenants (retail, office, etc.), allowing virtual owners to generate cash flow, similar to real estate in the real world. Analogous to real estate in the real world, due diligence is encouraged by assessing comparable property and land values as a benchmark to better understand price and value. [2]
Investors are likely perplexed by the novelty or complexity of buying, renting and investing in Decentraland. Metaverse Property, and others like them, was created to make transacting in virtual real estate more efficient through various service offerings such as property management, property development, consulting and marketing. [2]
As more household brands enter the Metaverse, implementations like Decentraland are becoming increasingly interesting investment opportunities for institutional and retail Investors. As interactive content increases, the platform garners greater value resulting in the attraction of more users and thereby increased corporate support. [2]
Virtual real estate vs. Physical real estate
Specific Uses
Real, tangible real estate is necessary for those living in physical reality. Physical real estate provides occupiers shelter, a place to bathe, dress, eat, work, gather and sleep. It is difficult to imagine the physical world without real estate playing a central part in our lives. In contrast, the emergence of Metaverse or virtual real estate has been centered around non-essentials such as retail, recreation and social activities, which may provide entertainment but are not essential to our daily physical lives. [4]
Limited Data
Real estate records can be traced back decades or hundreds of years in the physical world. In contrast, the Metaverse didn’t exist until 2002 (Second Life). Other, more well-known platforms have begun to emerge in the last few years. Because of Metaverses’ infancy, there is scarce data to help determine current and future asset values, making investment highly speculative. [4]
Record of Ownership
A blockchain entry is made when you purchase an NFT; however, there is no central location to track ownership, anonymous to all except the owner whose ownership is recorded in a password-protected virtual wallet. The virtual wallet has proven troublesome as there have been instances where buyers have made the mistake of losing their wallet passwords and thus NFT assets due to the lack of a central authority maintaining ownership records. [4]
World Closure
Unlike physical real estate and the real world, there is always a risk that the virtual property will cease to exist if a platform runs into a situation lacking funds or interest. [4]
Rules
Virtual real estate is not constrained by the laws of physics that apply to physical real estate. Furthermore, no planning or zoning code establishes an orderly development pattern across neighborhoods by identifying what may be built on a piece of property. The lack of zoning and fundamental physical constraints gives complete imaginary discretion to Investors on what to erect on their lot. [4]
Streamlining of Assets
There isn’t a danger to public health in the Metaverse, making event spaces and retail more streamlined, freeing space that used to be devoted to storage, bathrooms, offices, etc. [4]
Construction
The Metaverse can be accessed in all places simultaneously, making events more accessible to anyone, anywhere in the world. The accessibility of the Metaverse may increase regional brand presence as brands will not have to invest in infrastructure to expand their reach. [4]
Scarcity
Even though there are plot limitations in any Metaverse, there are theoretically unlimited platforms. While the principle of scarcity will apply within every platform, users may not think the platform they are currently using will be hot forever and choose to migrate their assets elsewhere. [4]
Currency
The NFT market is in its infancy - its worth tied to aesthetic and sentimental value. More importantly, its worth is difficult to gauge as a long-term investment and remains speculative. NFTs are illiquid, volatile and not widely understood. The marketplace remains relatively small, making NFTs challenging to trade and prices highly volatile during periods of distress. Lastly, NFTs require a large amount of computing energy to create blockchain records sparking growing concern around the long-term harm the process has on the environment. By some estimates, carbon emissions from mining cryptocurrencies and NFTs will exceed London’s emissions in the coming years. [4]
Metaverse: Investor and Manager Interest
Republic Realm, now Everyrealm, invests, manages and develops assets, including NFTs, virtual real estate, Metaverse platforms, gaming and infrastructure. [5]
Everyrealm has been an active investor in Metaverse real estate through its Republic Realm Division, headed by Janine Yorio. Everyrealm began investing in the Metaverse but has since expanded its mandate to become developers of Metaverse content. The company recently launched a retail store concept in Decentraland, which it plans to expand further into other Metaverse platforms. Nearly 10,000 virtual items in the store were sold out within an hour. [5]
Everyrealm’s objective is to become “the gateway to the entire Metaverse ecosystem.” To date, the firm has invested in 25 different Metaverses and owns 300+ NFTs. [5]
Everyrealm has raised $60 million as a standalone entity, which according to the firm, is one of the largest Series A rounds for a company led by a female CEO. Andreessen Horowitz’s Arianna Simpson led the round as a new investor alongside a mix of old and new Investors, including Coinbase Ventures, Lightspeed, Dapper Labs and angel Investors Paris Hilton, Lil Baby and Nas. [5]
Jamestown Properties has begun investing in programming companies and various solutions to align Jamestown to move into the Metaverse space. Michael Phillips, Jamestown Properties President, believes that the Metaverse is a natural extension of the internet and smartphone culture that will complement traditional real estate in the same way as mobile technology. [6]
CEO of Meta Platforms, Mark Zuckerberg, views the Metaverse as a successor to the mobile internet, investing time and resources into data center infrastructure, virtual reality and augmented reality products and content, and hiring or reorganizing talent. [1]
Microsoft recently acquired Activision Blizzard, the troubled video game company, for nearly $70 billion, believing that people will continue to spend a larger share of their time in the digital world. Microsoft has framed the Activision deal as an avenue for strengthening its position in the Metaverse. [7]
MetaCollective is focused on developing this corner of the future internet into a learning center or university for self-education on all things Web 3.0. Drew Austin, a leader for MetaCollective, envisions virtual classes, dormitory rooms that users can rent. “We can recreate what an educational digital experience is in this new digital world.”7
Conclusion
The Metaverse came into mainstream consciousness as a temporary workaround to the COVID-19 pandemic’s social restrictions. Users and developers of virtual technologies saw an opportunity to bring users together in a collective space to enjoy virtual concerts, movies and entertainment. In contrast, brands and corporations saw a window to expand their reach beyond the physical world. Real estate Investors and Investment Managers saw an opportunity to capitalize on a new frontier, one in which they can play an outsized role in shaping. Although land values have increased at an impressive clip, there remain many risks and headwinds within a short time before we see widespread adoption of the Metaverse and its properties. Risks include the infancy of virtual currency and its illiquidity and volatility and reliable and secure property ownership data. Headwinds to mainstream acceptance include the large-scale adoption of virtual reality headsets, data center infrastructure and the easing of COVID-19 pandemic social and travel restrictions as we move into a stage of conventional normalcy.
"Expansion of the Metaverse is exciting, and expands opportunities for education, marketing and entertainment, among other things," said Colin Hill, Senior Vice President, Real Estate Consulting at Meketa Investment Group. "The impact on bricks-and-mortar real estate, however, remains to be seen. We see the potential for enhanced omnichannel retailing and more realistic virtual leasing tours, but also the potential for retail/entertainment disruption and further displacement of in-person meetings. What we do know is that an expanding Metaverse will require greater data transmission, which could bolster tenant demand for data centers and generate increased investor demand in that property sector."
About Alliance Global Advisors:
Alliance Global Advisors is a women-owned consulting firm focused on empowering the institutional investment community to elevate best practices. Advising clients with over $380 billion in assets under management, Alliance partners with organizations to provide an independent perspective and innovative approach to critical strategic initiatives. Our partnerships allow senior management teams to focus on what matters most: diligently managing client capital, creating value and delivering exceptional returns in a performance-driven market.
Disclaimer: This blog was originally published in April 2022 and will be updated periodically to reflect changes in the industry. The content may contain or cite personal and/or professional opinions that differ from the views of Alliance Global Advisors.
[1] Goldman Sachs Research: Framing the Future of Web 3.0 Metaverse Edition
[2] The Metaverse Series Part One: Decentraland
[3] Deloitte: The Metaverse Explained
[4] The Motley Fool: Five Myths about Virtual Real Estate in the Metaverse
[5] TechCrunch: Republic’s Metaverse real estate arm spins off, rebrands as Everyrealm
[6] TheRealDeal: Jamestown plans New Year’s ball drop at Metaverse Times Square
[7] TIME: Why Investors Are Paying Real Money for Virtual Land