Decentralized finance, DeFi, is really the perfect use case for blockchain technology. It seems obvious to me that DeFi will eventually overtake the legacy finance system, I won’t really explore that concept (but others do a great job), I really take it as a given. How long this process will take is unknown, but it will begin at the margins of our financial infrastructure. My main focus is how and where this will impact commercial real estate (CRR), which is in many ways an economic sector that is a derivative of the legacy financial system. So, if DeFi disrupts legacy finance & CRE is a derivative sector, it stand to reason that it will also be disrupted. My aim here is to put some definition to the main ways this will occur. I think it is useful to chunk up this disruption into the following three categories:
i) Process — mostly tansaction based parts of the industry that will be subject to automation in general, but are very good use cases for blockchain. Escrow and title are very good examples. Transferring tittle involves a third party who pulls title from the State and offers insurance products. DeFi will be able to compete with title insurance, but the regulatory aspect and State interface makes scalability challenging and is counter to the ethos of the project, which is more or less to completely eschew all existing institutions and state actors. Escrow lends itself to be completely subsumed by blockchain. Escrow is essentially a merkel tree managed by people. I imagine an escrow interface whereby a set of individuals are notified a deadline is approaching; eg, physical inspections, the required parties either sign, thereby releasing funds or triggering the next deadline, or the escrow is canceled and funds are returned.
ii) Securitization — it is not obvious to me how payment collection will evolve and become mainstream, but it is clear that it will. The flow of capital in a commercial property essentially goes tenant ->property manager -> ownership -> investors -> lender. If a payment system emerges whereby rent is distributed immediately, this will mitigate risk, thus making the lending market less fragile. We can even imagine stepping this out whereby money taken in from clients is immediately distributed & tenant ‘books’ are all open. This would be especially useful in shopping malls, where landlords can collect a % of gross receipts.
iii) Meatspace impact — There are already Amazon stores where you can leave with products and be automatically charged. The space is built with weight detectors and facial recognition software. As payments increasingly become automated, the way we construct retail, industrial warehouses offices and Multifamily will change. I am not sure DeFi is causal per se, more part of the emerging landscape. Imagine an apartment building with 500 people all getting deliveries from drones and driverless cars: you need to build for all this through traffic. This is already a trend, but encrypted identity verification will enable the proliferation of automated logistics and the CRE community needs to start building meatspace accordingly.