3 Ways Blockchain Benefits the Commercial Real Estate Industry

Hear the term blockchain and you might automatically associate it with Bitcoin or other cryptocurrencies. While that association is valid, blockchain technology and the smart contracts it supports has uses that extend far beyond digital payments and even has applications as a record-keeping system in industries such as commercial real estate (CRE).

When put to use, this technology can impact every part of commercial real estate transactions, including due diligence, document storage, fund transfers, management and more, and make the process of commercial real estate investing and leasing more efficient and accessible.

"Blockchain's ability to provide transparent, secure information is a huge benefit to the industry that companies just can't ignore," said Paul Bracht, national account manager of real estate at Chetu, a software development company.

For the uninitiated, blockchain can seem a bit complex and inaccessible, but the idea is relatively straightforward. It's based on an old-fashioned concept — the ledger.

"Blockchain is, simply put, a digital ledger (or a log), in which transactions made, notably in cryptocurrency, and are recorded chronologically and publicly," explained Dr. Michael Yuan, a co-founder of The CyberMiles Foundation and CEO of Second State, a global provider of smart contract-based business solutions.

When a new transaction is made or updated, the technology creates a "block" of data to add on to the previous block — hence the name blockchain. The technology behind blockchain takes a standard ledger, which for commercial real estate purposes might hold a list of property titles, deeds or contract information, for example, and makes it digital and decentralized. Blockchain has a few big advantages here.

One primary benefit of blockchain technology is that it is secure. Having a "distributed ledger" means no one party controls the ledger; there is a public history of every transaction and a source of proof that a transaction has occurred. The information stored is encrypted, and any transaction and/or action made to it is easily traceable and tamper-resistant, so the data can't be manipulated. It also reduces the risk of fraud, double spending, or other manipulation of transactions.

Transparency is another advantage experts often cite as a benefit of blockchain, especially for financial transactions and property details. The distributed system helps gather the most up-to-date data in one place, like listing information or due diligence documents, for example, which streamlines the time-consuming research process of buying or leasing real estate. Bracht has seen his clients take an interest in blockchain for this reason.

"This transparency not only allows for better decision-making, as more information is readily available, but also helps promote efficiency and reduce costs," he said.

Many blockchain technology applications are already being integrated within the day-to-day workings of the real estate industry. While some of these may still be flying under the radar, experts say that the use of this technology in commercial real estate is just beginning.

Here are the three most important ways blockchain is impacting the real estate industry right now.

Smart contracts. A standard commercial real estate contract is rarely a simple document. Instead, it often has a variety of clauses that are dependent on other factors.

With blockchain, the parties involved can create a smart contract. Smart contracts are created by computer programs that generate the contract based on predetermined terms and rules that are set by the parties involved and then written into the code. Essentially, a smart contract operates independently and helps remove the middleman, which also helps cut down on the costs associated with them. Using code, the contract self-executes and moves each step along to its relevant party in the process once the conditions of the agreement get validated, and initiates automatic payments for either sales or lease agreements.

"Imagine a real estate deal that automatically concludes once your bank electronically uploads proper documentation of your loan," Yuan said.

By using a smart contract for a real estate transaction, all parties have proof of contract and execution that is transparent, official and secure. Yuan highlights how this technology can create a new ecosystem applied in "potentially transformative ways, including to support a large library of smart contracts that power decentralization of processes such as dispute resolutions."

Due Diligence. Blockchain can securely store due diligence data collected before an asset purchase, such as the specific details of a building up for sale. This might include zoning permissions, titles, and existing building leases, as well as history of occupancy, payments, and performance metrics.

For interested developers and investors, having immediate access to building records, maintenance history, and occupancy data in one place is a goldmine that reduces the amount of time and money spent chasing paperwork and verifying information.

“On average, our clients are finding that around 5% of transaction costs are spent on simply verifying information, which is something a common ledger through blockchain would have already verified and [made] easily accessible,” Bracht said. "Cutting those costs and streamlining pre-lease due diligence gives our clients an edge to be more effective on a day-to-day basis."

Sellers and finance institutions can also conduct due diligence on a buyer to review and evaluate loan terms and amounts, thereby expediting the underwriting process.

Beyond reducing the potential of human error, developers and investors can make quicker and better decisions based on more reliable, real-time data.

Property management and leasing. Commercial real estate experts are also paying attention to how blockchain technology can streamline and simplify property management.

One key area is the leasing process. The applications used by blockchain can cut across everything from improving listings information to lease management, due diligence, and real-time data.

With listings available in one database that have all the relevant information, transaction history, floor plans, and photos, interested parties don't have to go on the hunt for what they need. Instead, all of the available data is available in once place.

Additionally, beyond streamlining and centralizing smart contracts and due diligence, blockchain technology can help with lease management as it automates payments from not only lessees but also contractors, vendors and maintenance providers. It also monitors cash flow in real time, eliminating much of the complexity involved in keeping track of ongoing lease agreements and property operations.

For now, it seems that the commercial real estate industry is starting to tap into the power that blockchain technology can provide now and into the future.

This article was edited by Lauren Shanesy.