Few people have strong opinions on virtual real estate. For most, the term is a head-scratcher. They’re not sure what to make of it.
But for a small group of advocates and detractors, the subject of virtual real estate evokes spirited elevator pitches or fierce criticism. Depending on which group you ask, virtual real estate is either the future of work, commerce and socialization, or it is an overhyped, undesired novelty. Either it is the building blocks of a bustling digital metropolis or the building blocks of a worthless digital ghost town.
Given the whirlwind few years that the budding industry has had—sales volume surged to $500 million in 2021 before plummeting this summer—in addition to all the media buzz around the subject, it’s worth taking a deeper look at the arguments of both the enthusiasts and the naysayers.
But first, a brief overview is in order.
The basics
What exactly is virtual real estate? In short, it is a piece of unique digital property accessible via NFT, which is essentially a deed of ownership. It might be a parcel of undeveloped land or an office building or a seaside villa. What’s important is that it exists in a digital form and that ownership can be proven.
This digital property exists and is accessed in the metaverse, which is another somewhat amorphous concept in need of a more narrow definition. But currently, metaverses are understood to be any immersive digital world geared toward social interaction. These include platforms accessed through virtual reality, augmented reality or simply a computer screen. Minecraft, a popular game with millions of daily users, is an example of metaverse. Horizon Worlds, run by Meta (Facebook) is probably the most well-known metaverse, though it’s been the subject of considerable online ridicule on account of its poor graphics.
However, both Minecraft and Meta’s Horizon Worlds—though they might be filled with digital buildings—do not technically have virtual real estate, which is an important distinction. In order for virtual real estate to exist in a metaverse, the platform must allow users to own and monetize their digital assets—this is made possible through decentralized blockchain technology. Without individual ownership, users are interfacing with a world, much like a medieval kingdom, owned entirely by one governing entity.
Currently, there are a variety of metaverses that satisfy the requirements for virtual real estate, but two of the biggest players are Sandbox and Decentraland. Each is based on the Ethereum blockchain, meaning transactions are facilitated through the cryptocurrency ETH. In addition, each has a limited number of parcels, or pieces of land for sale. In these worlds, users, through avatars, can play games, socialize and attend virtual events, such as concerts or fashion shows.
The value of any given parcel is determined by a number of factors, perhaps the most important of which is the platform’s overall popularity—if no one is using Decentraland, or if it were to cease existing, then its value would drop to zero. In addition, much like in the real world, a parcel’s size and location also affect its worth. Naturally, larger pieces of land are more valuable, and property near highly populated or trafficked areas or in areas near celebrities like Snoop Dogg—who owns property in Sandbox—is worth more.
Virtual land prices, along with cryptocurrencies, have been down significantly since the beginning of the year, with the average price of land across the top 10 virtual platforms falling 80% since February. The average price of a parcel in Sandbox, as of August 24, was roughly $3,000; while the average price in Decentraland was roughly $1,000, according to nonfungible.com, an NFT data curator.
So why would anyone, particularly given the recent downturn, pay thousands of dollars for intangible property?
Proponents
Advocates look at virtual real estate as a speculative investment that they hope will reap dividends in the near future. Though hope may not be the right word since proponents—many of whom are industry insiders with a vested interest in virtual real estate’s success—tend to speak with a fatalistic zeal about the technology’s trajectory. They often draw an analogy between it and the early days of the internet or social media. Virtual real estate, and time spent in the metaverse, is simply the next logical step, they say.
Their confidence is not wholly unmerited. McKinsey released a report in June concluding that the burgeoning industry has the potential to generate $5 trillion by 2030 and is “too big for companies to ignore.” Before that report was even released, during a metaverse land grab earlier this year, JP Morgan and Samsung acquired property in Decentraland, and HSBC and Adidas bought land in Sandbox.
“I was a dot-com banker back in the mid-’90s,” says Lorne Sugarman, CEO of Metaverse Group, which claims to be the world’s first virtual real estate company. “My view is that this is just the next generation of the internet. It’s certainly going to look very different than what we’re seeing today. Our view is we’re here in the early days.”
While the exact details of what virtual property will be used for are still being ironed out, and graphics remain shoddy, there is consensus amongst promoters around the idea that people will be drawn to it, if slowly at first.
“As the technology and the platforms get better, and we introduce more hardware, then it’s just going to be more engaging, and the use cases are going to continue to grow,” adds Sugarman. His company, Metaverse Group, owns land in about 10 metaverses and rents it out to brands for an average of three months at a time. Decentraland’s Metaverse Fashion Week, which happened in March, was hosted on 165 parcels of Metaverse Group’s land and included brands like Dolce & Gabbana, Etro and Elie Saab.
On the subject of the industry’s sudden and precipitous drop in value in recent months, most supporters respond in a similar fashion. Volatility is normal for emerging technologies, they say. And some equate their startups to companies like Amazon that managed to survive the dot-com bubble.
“The whole market has corrected,” says Gwendall Esnault, founder of Metahood, a metaverse real estate marketplace. “You had a lot of speculation. Everyone was going crazy. You had a big NFT frenzy in late 2021. And it’s natural, you know. You had a lot of people who had no idea what they were investing in.”
“What happens when the volume is really low like it is now, is a lot of people who are not professionals in the sector or not veterans, they think ‘oh it’s dead, it’s a fad,’” says the anonymous founder of Metaplaces, a recently launched virtual real estate company. “But the next time it goes up, and it will go up very fast, that’s when will say, ‘oh wait. I need to do something about it.’” People who purchase customizable digital homes from Metaplaces can send a link—similar to a Zoom link—to friends or clients who can join as avatars, and socialize or host meetings in the luxury 3D house. Customers can display their NFT art in the home, and a cinema room is allegedly still under construction.
Detractors
Critics take issue with just about every aspect of this new technology as well as its promotion. Even the name virtual real estate is not immune from attack.
It’s a “terrible name in my opinion because people think it will be more valuable in the future,” says Molly White, a software engineer whose blog makes “the crypto industry cower,” according to the Washington Post. “But I’ve yet to see any compelling reason it actually would be.”
White and other detractors believe that the term ‘real estate’ leads people to think of digital property as a safe investment, when in reality, brick-and-mortar real estate has little in common with virtual real estate, in their minds.
“These things are sold as stable, anchor investments; they’re sold with a sense of FOMO,” said Jathan Sadowski, an emerging technologies researcher, in a recent interview with the Griftonomics podcast. “These are the kinds of ways these crypto markets and assets are sold to people, and that to me is really dangerous, and that is the grift ultimately, and it’s extremely socially harmful.”
Beyond the obvious fact that no one can actually live inside their digital property, another key difference between the virtual world and the real world is that there are many, potentially unlimited, metaverses. Therefore, risk associated with purchasing digital land is heightened because demand for any specific metaverse may fluctuate wildly. Further, scarcity is entirely manufactured in virtual worlds, and new parcels could, in theory, be minted at any time, reducing the value of existing parcels.
Sadowski also added that because there are currently no laws specifically regulating the metaverse, the general laws governing the internet are applied by default. This means that virtual real estate is subject to contract laws “aka terms and conditions” and not property laws. Because of this, metaverse companies would likely have greater ability to remove users from their platforms if they violate the terms of agreement, thereby revoking users’ access to their digital assets.
In addition to the associated investment risks, White and Sadowski are highly doubtful of the demand for this type of technology. White says that the concept of “strapping on a VR headset and going to a virtual piece of land where there’s an ‘office’” is not likely to woo workers.
Widespread usage of virtual real estate is only likely to come about inorganically—in other words, it will only be used if companies mandate it, according to Sadowski. “It’s gonna be our bosses or employers telling us ‘this is your office now.’ And/or it’s going to be schools and universities telling us ‘this is where classes happen.’ Why would they do that? There’s a lot of value for them. Less overhead for campuses and offices, but also, there’s a branding and reputational value of being on the cutting edge,” he said.
Perhaps one of the most surprising critics of virtual real estate, and metaverses more broadly, is Philip Rosedale, an entrepreneur who developed Second Life, one of the first virtual worlds to gain popularity, in 2003. His critique, which he laid out in a live interview with the Wall Street Journal, is two-pronged. On the one hand, he worries about the potent mix of metaverses, artificial intelligence and ad-based revenue.
“In a 3D world where we are embodied as avatars, the person across the street having a coffee and smiling at you might be an advertisement of some kind,” said Rosedale.
On top of that, he added, “If you’re wearing a VR headset, or even sitting in front of a camera and you have a microphone on, the information that can have about you is horrifically beyond even the overly dangerous information that they have about you today.”
His second criticism, which echoes White and Sadowski, is aimed at the supposed demand for these immersive worlds to be incorporated into everyday life.
“If you’re able to live in New York and socialize with your friends, you’re going to do that,” he said. “And this is what Facebook’s going to find out.”
The takeaway
Still, the future is unknown. Whether these immersive digital worlds will be filled to the brim with students, workers and gamers, or whether they will sit empty and forgotten is anyone’s guess. It’s possible that a great majority will fail and a triumphant few will capture the market in the coming years.
Arielle Biscayart, a REALTOR® with Coldwell Banker in Miami who assists clients in purchasing virtual real estate in Decentraland, advises hedging your bets. “Why not have a little chunk of investment and see what happens?” she says. “But people have to be okay with that money—just like on the stock exchange—they have to be okay with losing it.”
“You might have a great surprise down the road in a few years or you might lose it,” concludes Biscayart, who notes that there is currently no formal process for paying agents who advise or broker virtual real estate transactions. “Nobody can tell you what’s going to happen. If they say it’s going to be worth five times the price in five years, I think they’re just BSing.”
