Investors Should Know These 5 Things About Virtual Real Estate

Just like your oft confounded correspondent, you’re likely trying to avoid speculation about the metaverse at least until it’s an unavoidable part of our daily lives. Well, that may happen before you have a chance to accept it. In the meantime, LoopNet is here to round out the last of this three-part series on the metaverse with some key concepts for real estate professionals to keep in mind — even if the topic is not top of mind.

After introducing the concept of virtual real estate and establishing that there are indeed real people and brands spending unthinkable amounts of real money in the metaverse already, we’re back to conclude the series with key aspects to consider before buying virtual real estate.

Let's start with the idea that though it's fairly simple to buy a plot of digital land in the metaverse, it's not so simple after that.

Creating a building in the metaverse will one day be as easy as creating your avatar — meaning a few clicks through a menu of customization options. But currently, it’s surprisingly similar to constructing real structures.

Just as you would need a contractor to build out a brick and mortar storefront and an interior designer to fit it out, the same is true in the metaverse, explained Dan Reitzik, founder and CEO of TerraZero Technologies, a developer of virtual real estate in the metaverse.

TerraZero has an actual architect on staff, along with a large studio of 3D modelers, and Reitzik said the design process for a tower like its headquarters (pictured below) for instance, is arduous and expensive — costing up to $60,000.

But TerraZero wants to provide a more plug-and-play alternative as well, Reitzik said, “with prefabricated designs like a bar or a stage, for example, that users could rent for, say, $500 a month.”

Internationally revered architectural firms are also flaunting real-world expertise and getting in on the metaverse action. Bjarke Ingels Group (BIG) designed an office building for Vice Media Group in the metaverse world Decentraland, for example, and Zaha Hadid Architects is working on creating an entire virtual city in its own, entirely new metaverse platform.

Another developer of virtual real estate, MetaSpace REIT (MREIT), also used a “real architect and a real architectural rendering program to develop [its] headquarters, so that it looks realistic,” before “publishing it” on Decentraland, CEO Eric Klein told LoopNet. A trust that offers cyrptocurrency tokens as investments in its metaverse real estate operations, MREIT does the same type of virtual property development for its clients, but programmers on the backend also link the asset to a non-fungible token that can then be traded on the blockchain.

Klein said that the Decentraland platform still has some memory issues that stifle what you can develop, though. In contrast, Somnium Space, another virtual reality metaverse platform on the Ethereum blockchain, permits more “intense programming … to create a beach, a skyscraper, whatever you want.”

You might also imagine that, though parcels of digital land are limited to a certain width and depth on a grid, the “sky” is an unlimited vertical expanse, and the nature of it being virtual means its functions are also theoretically limitless. That’s not the case, Reitzik said. “The amount of land that you own determines how big or how high your building can be. It also determines how many [users] and how much detail you can have in your scene at any given time.”

So while a single parcel of land in Decentraland is currently trading for around $15,000, he said, “It really is not that useful. You kind of need at least two adjacent parcels to make something like the TerraZero headquarters, for example, which is around five stories and includes streaming video and other more technologically demanding functions.”

Metaverse pioneers who have already staked their claim in the cyberspace frontier span a diverse range of entities including appliance companies like Dyson and religious organizations like VR Church. Many of them rely on technological proprietors like TerraZero and MREIT to bring their vision to (virtual) reality.

But how does a user know where to go to browse a digital vacuum shop or worship virtually with their fellow congregants on Sunday? “You kind of have to know the coordinates of where you're going, and simply punch those in and you’ll teleport there.” Or, in other words, you could click a link from a website in your browser and get to where you want to go in the metaverse.

“It’s similar to buying a big vacant plot of land in real life. You build the mall, and then you rent out the individual stores in that mall.”

Dan Reitzik, CEO of TerraZero

So, with myriad purposes eventually cropping up, you might want to buy up land and wait for the offers to roll in. When MREIT started kicking around in the metaverse, realtors brought them some clients who were looking for an investment play. “They bought land in Decentraland for a couple hundred bucks a year and a half ago, and now the average price is around $15,000. And that’s just simply buying and holding.”

But that kind of pursuit is going to stifle the advancement of the metaverse as a whole, Reitzik said — and Klein concurred. “The last thing we all want is for users to walk around in a metaverse world and see nothing but empty plots of land,” Reitzik said. “Users would exit [that metaverse platform] and not come back. So speculation is not something that I encourage.”

Instead, commercial real estate-minded entrepreneurs would likely do better for all by becoming developers of the metaverse. “It’s similar to buying a big vacant plot of land in real life,” Reitzik said. “Or it’s just like if you were a real estate developer owning malls. You build the mall, and then you rent out the individual stores in that mall — that is very viable.”

It’s not an “if you build it, they will come” sort of deal, because not a lot of prospective metaverse tenants are aware of what can be built, Reitzik said, and users don't yet know what to look for. Even if you build something, you still have to promote it by traditional means.

That's why TerraZero is developing most of the land it has. Decentraland is owned by roughly 10,000 — 20,000 property owners currently, and TerraZero might hold more than any other, with around 230 parcels and counting.“We own 185 parcels in one ‘estate,’ where we’re building a destination entertainment district, with a stadium that will host a different concert every week and a shopping mall and maybe an aquarium one week and a zoo the next,” said Reitzik.

“If you create something cool in that space, you can tell people how to get there,” Klein explained. “But if you just hope people will walk past it, people aren't going to necessarily go over there,” he added, unless it’s in a good location near other destinations where users are milling about.

So yes, the adage about location trumping all other characteristics of a real estate asset come into play in virtual reality, too. Remember that these metaverse worlds are intentionally limited by number of parcels to create value for stakeholders and users. Most of them have roads and sidewalks, and places where the user is “dropped” into by default. Having land in a well-trafficked area, either in a central location or near other places users would visit, means it will get “foot traffic,” Reitzik explained.

Similar to the real world, that’s how market value is determined. “In Decentraland, for instance, it’s certainly better to be located on a road near good neighbors,” Klein said. “A plot of land near Nike is worth a hell of a lot more than one next to vacant plots of land.”

People who own random plots of land might ask whatever they want when listing it for sale. But once an area gets built up with some activity, “that’s when market value gets similar to traditional real estate,” Klein said. “When we picked up the land for our HQ, we saw that our neighbor was selling for X and our other neighbor was selling for Y, and we were below that threshold.”

Value also rewards those who make the first move, though, Klein continued. If you build or attract real estate projects to your site, you can create community value, he said.

A good example of that dynamic happened in The Sandbox metaverse, when the brand behind the rapper Snoop Dogg started creating the “Snoopverse,” complete with a digital twin of his California mansion, for virtual events like pool parties and sales of exclusive digital items as NFT transactions. Neighboring land quickly sold for an exchange rate of $450,000, according to Decrypt.

“We held a launch party in our HQ and promoted it, and a lot of people came,” Klein said. “Once they were there, they ran around and looked at other things.” Wise advertisers could put up digital billboards and promote their projects in and around that area where users are congregating, he said.

In Decentraland, as a landowner, or a “tenant” with land rights, “you can put your logo up and create some sort of cool VR experience, and there might be 300,000 people running around [in certain areas]. It’s like Google Ads — you want to be where the eyes are.”

But, as Reitzik acknowledged, even though there are roads and sidewalks for users to run around on, the laws of physics don’t apply in cyberspace, where users can simply “teleport” to different destinations.

“There are different outcomes for what you're trying to do,” Klein said. “It's not one-size-fits-all. If you're throwing a concert, for example, it's going to be destination-based.” Location, in that case, doesn’t matter. Users would just need to know where to go, which they’d learn from a website or on social media.

“In a regular city, we know where the shopping district is, we know where the banking district is, we know where the office environment is, we know where the bar environment is. That has still not taken shape in any metaverse world.”

Dan Reitzik, CEO of TerraZero

Most metaverse retailers or advertisers, for example, don’t know where the best “land” is for their purposes. But it might not matter. For them, “There's not a lot of point in buying land, because you could choose the wrong location," Reitzik explained. “In a regular city, we know where the shopping district is, we know where the banking district is, we know where the office environment is, we know where the bar environment is. That has still not taken shape in any metaverse world.”

So instead, these businesses rent land — especially on short-term bases for pop-ups, ad campaigns and marketing initiatives, based on known events. They pay entities like TerraZero rent, and sometimes hire them to help build what they need.

Rights can be negotiated, with some deals being similar to a traditional freehold and others being more like a ground lease. “We act as landlord, with a client paying us a development fee to develop it,” Klein said. “We can assign an operator to an asset or a building and give them full control over the building to operate it as they wish, and then they pay us a rental amount every month.”

If you don’t know where to invest, or don’t actually want or need anything to do with the metaverse yourself, that’s where investing in MREIT comes into play. “If you buy the mreit token, you get part of whatever we do revenue-wise,” Klein said.

Other arrangements are more like a strange ground lease in which the tenant takes the building with them when they leave. “Once you have a virtual asset, such as a building, the great thing about the metaverse is that you can simply relocate that building to another plot without having to rebuild it, unlike in the real world,” Reitzik said.

Assets in one metaverse world are still limited only to that metaverse world, though. There’s currently no interoperability between all of the thousands of metaverse worlds that exist, Reitzik explained, though he said he’s confident that won’t always be the case. “Right now, you cannot take your avatar and all of your assets in Decentraland and go hang out in The Sandbox, for example.”

In the meantime, both Reitzik and Klein are both basically metaverse world-agnostic — making plays in some of them but also waiting to see what happens where.

That’s because it’s very apparent among those playing around in and observing the high-risk metaverse investment arena that a certain platform could lose all value almost overnight — unlike any form of real estate in the physical world.

But they’re also bullish on “the metaverse” becoming not just a place a user goes, one platform at a time, but an inevitable way of life that is slowly unfolding. “By the end of this year you're going to start seeing the beginnings of actual, immersive 3D metaverse worlds,” Reitzik said. “By late next year I think you're going to see it fully matured.”

VR will be more immersive in the next few years, he continued, as the technology powering clunky headsets that are used now are streamlined to accommodate wearble devices that are more like sunglasses.

“You might wear augmented reality glasses into a mall in Chicago, for instance, walk into a Nike store, and instead of just seeing the real shoes that you see on the wall, you'll see three or four different digital versions of those shoes that you can't see with the naked eye.” You’d be glimpsing into a Nike "store" on the metaverse, which Reitzik wouldn’t mind collecting rental income from.

Will that be in something like Decentraland, or one of the thousands of other metaverse platforms that exist, or that are yet to be developed? No one knows.

“We're not going to have one metaverse world that fits all uses,” Klein said. “I think it's going to be sort of dictated towards industries. We'll see a bunch pop up and we'll see a bunch die. What we need is to have somebody curate and hand-pick some of the best assets in various worlds, and put them in one platform, similar to what LoopNet does with real-world assets.”

Large commercial real estate firms and brokerages, like Cushman & Wakefield and JLL, will start helping their clients navigate metaverse leasing and investing, Reitzik said. After brainstorming with several, his firm is going to position itself to try to help them with a marketplace of its own that would operate much like LoopNet's marketplace does, he said. “It’s like an Airbnb for metaverse land. You can go look at different listings, you can look at the neighbors’ properties, you can see what kind of things are happening in that particular district. You can even rent prefabricated stages, buildings or retail stores.”