In today’s commercial real estate, large technology systems used for high-volume financial settlements are not a great fit. As an asset class, commercial property’s tendency toward illiquidity carries a peculiar anti-technological bias. In CRE, most financial settlements occur in the process of property transactions such as purchases or leases. These tend to have lifetimes measured in months and years, as opposed to stocks and bonds, where ownership and packaging can repeatedly change on the basis of seconds and minutes.
The added volume and complexity that comes with comparatively liquid stock and bond markets has been a driver for the creation of high-technology settlement systems that tick along in the background of Wall Street. These back-office utility systems are seldom thought of, but in fact provide market participants with a critically important service: the bedrock truth about ownership and transactions.
In the CRE world, comparable truth is about keeping track of payment, escrow and title. By and large, these mechanisms are designed into contracts known to the parties, crafted to describe an immediate future where the players are unlikely to change.
That said, not everything here runs at the speed of paper. The industry has developed its own investment vehicles – REITs, private equity, CMBS, crowdfunding – and can be expected to create more in the future. When those vehicles are created, expect to see greater involvement of the blockchain.
What’s the Blockchain?
Today, when money moves into or out of a transaction, we update at least one ledger. That ledger could be a hand-built Excel sheet, it could be a database system containing all transactions, it could even be paper, presuming you’ve got a goose quill to match. Typically, ledgers are, like most accounting, private.
The blockchain is a very modern software mechanism to conduct payments, accounting, escrow, repurchase, even title, in full view of all parties, subject to contract rules. Consider it a distributed ledger. It operates in public, heightening transparency of transactions. It can be automated, meaning the funding, for example, of escrow accounts ahead of dependent transactions found in leases or purchase agreements can be made automatic, potentially speeding up the transaction and heightening financial predictability.
Growing past its origins as part of the digital currency called Bitcoin, the blockchain’s features are attracting attention from increasingly heavy hitters in finance.
Getting Ready For Prime Time
In a sign that the blockchain is maturing, it is now being offered as a primary technology by a giant among those back-office settlement systems I mentioned earlier. DTCC, the Depsitory Trust & Clearing Corporation provides a raft of services to financial markets, including the tracking of repurchase agreements between banks. With this week’s announcement, DTCC will be offering the blockchain as the means by which counterparties will conduct automated repurchase business, a kind of short-term financing where debt bounces between opposite ends to meet a goal.
This doesn’t mean anything’s changed in commercial real estate, but it does mean the blockchain’s features are going to get their moment in the mass-financial-market sun. How well the blockchain does at delivering predictability, liquidity, transparency and other features that mark popular investment vehicles is a great indicator for how much change is on the horizon for CRE –from leases to securitization and everywhere in between.