NFTs (Non-Fungible Tokens) are not just a fad nor a get-rich-quick scheme; as exchangeable assets go, they’re also not like your grandfather’s old stock or bond certificate. The non-fungible part means the tokens are unique and irreplaceable. A financial security consisting of digital data stored in a blockchain, an NFT is a cryptographic representation of real-world items such as documentation, artwork, moments in sports, sneakers, even William Shatner memorabilia. While some may scoff at these digital assets, others are buying and selling at a fervent pace.

NFTs have already begun to revolutionize the art scene, sports, gaming, the web, music, insurance and more. With the world of commercial real estate (CRE) quickly evolving and expanding into the digital space, some experts say it’s only a matter of time until it too adopts the use of NFTs.

NFT Industry Applications

Did you know that the market for digital art NFTs in 2021 alone approached the total value of the entire global fine art market? The $41 billion value, according to blockchain data company Chainalysis, certainly explains why venerable auction houses such as Christie’s and Sotheby’s have sold millions of dollars’ worth of NFTs in the rapidly expanding market. That marriage of old school and new might hold lessons for the still traditionally rooted CRE industry.

Sports fans are often, well, fanatic about their favorite teams. That passion is reflected not only in attendance at their contests, but also team traditions, gear and memorabilia. Deloitte Global predicts that NFTs for sports media will exceed $2 billion in transactions in 2022, almost double the amount from last year. The company expects that 4 to 5 million sports fans across the globe will have purchased or been gifted an NFT sports collectible by the end of 2022. And for the superfans who like to tell others “I was there” at the big game, NFTs can also be badges that are given out as “proof of attendance.”

In the travel and leisure industry, one way NFTs are being tested is to help minimize excess hotel room inventory. According to The Wall Street Journal, room nights for sale are being converted into NFTs that hotel guests can buy and sell, very much like concert and sporting event tickets are resold online at StubHub.

Converting a room reservation into an NFT helps resorts such as Casa de Campo Resort & Villas in the Dominican Republic get paid for their rooms — even when a reservation is cancelled at the last minute. The guest can then resell or transfer the reservation in NFT form on the open digital asset market.

While an NFT room reservation may find a relatively niche market for now, appealing to true crypto-enthusiasts, Jason Kycek, senior vice president of Casa de Campo Resort & Villas, said that his resort “can reach another consumer that maybe isn’t booking through traditional means.”

NFTs and CRE

Uses of NFTs have begun to emerge within the CRE industry, where companies are looking to expedite and improve processes dealing with everything from building projects to lending. According to Aviva Sonenreich, Managing Broker of Sonenreich & Co, in Forbes, “blockchain technology is so incredibly powerful that I think it could eliminate many of the intermediaries in the commercial real estate industry.”

NFTs have been seen as a way to sell fractional ownership or debt on a property. Think of an NFT as “a digital deed, recorded in a storage system,” said Kristi Waterworth in The Motley Fool.

Giving NFTs Due Diligence

As with anything new, NFTs in CRE need to work through numerous issues. Since this technology is at its nascent stage, there’s much to be researched on NFT technology and how it might shape the future.

The U.S. Securities and Exchange Commission (SEC) has recently targeted this market and is currently conducting a probe into whether their broad scope is inclusive of regulating it.

According to Bloomberg, “A key legal question is whether digital assets including NFTs are securities, and therefore subject to the same rules as stocks. While the SEC has said that many tokens fall under its purview, some crypto enthusiasts argue regulations meant to police the equity markets shouldn’t also apply to virtual currencies.”

Commercial real estate investing has its risks, but even more so with a new technology. With NFTs being used for fractional ownership, there’s a question of legal right to control a property. Where would the rights of property renters end and NFT holders begin? If NFT fractional ownership followed down the investment path of crowdfunding, people would likely need proof that it could avoid some of the pitfalls of that model, including eliminating the middle man. NFT mortgages would also probably be susceptible to the same problems of centralization.

Ironically, the pandemic has had an impact on both CRE and virtual reality, with social distancing and remote work calling for new real spaces for people to expand their online life. As seen with cryptocurrency’s rise and now struggle, the virtual economy still holds broad appeal. And though this technology boasts having the world’s first NFT vending machine, the jury is still out, literally, on whether NFTs have a real future — or are just a token effort.

To learn more about commercial real estate and trends in retail, visit KBS.com/Insights.