Originally published June 2022.
How the metaverse may impact on the real world.
Sweat streaming down my face, I landed a punch straight into his midriff. The force of the blow sent him stumbling backwards. Now was the time to finish this. Reeling back my right arm, fist clenched tight, I swung forward, my full weight thrusting towards his face. An intense pain came next. Pulling off my virtual reality headset, I realised, blood dripping down my hand, that I had punched the Christmas tree.
December last year I took my first steps into the metaverse and it seems I’m not alone. Despite evident supply chain issues, the Meta (formerly Facebook) Oculus Quest 2 was one of the top-selling gifts of the holiday season.
There has been much written about the metaverse over the past few months. Much of it slipping into hyperbole. However, as real estate investors, we should be looking closely at anything that could influence the way we interact with the world around us.
What is the metaverse?
Definitions can vary, but the metaverse may be broadly described as an evolution of the internet, merging virtual and physical reality. It blurs the line between real life, augmented reality and online interaction in both a computer-generated environment and on virtual platforms.
As devices such as virtual headsets develop, the metaverse may gradually augment users’ day-to-day physical lives, developing into a self-sufficient economic environment where users may work, play, attend events, and buy goods and services.
Estimating the dynamic and timing of the metaverse evolution is difficult, but some suggest that it may mirror that of the internet, mobile communication and the digital economy, developing into a multi-billion sector over the coming decades.
For real estate investors, analysing the potential evolution of the metaverse is of strategic importance for long-term value preservation, risk management and possibly also provide some form of first mover advantage if new investment opportunities emerge.
Real estate within the metaverse
We’re already seeing the emerging of a pseudo real estate market within the metaverse. Land plots have been defined, investment vehicles established, assets developed and transactions completed. Today, one of the most active real estate markets is found in the virtual reality platform Decentraland. This metaverse has already seen virtual plots selling for millions of dollars.
“Often mimicking activities in the physical world, the metaverse has hosted concerts and art exhibitions, with Sotheby’s opening a virtual replica of its London galleries”
There are many reasons a company or individual may buy this space.Often mimicking activities in the physical world, the metaverse has hosted concerts and art exhibitions, with Sotheby’s opening a virtual replica of its London galleries. We’re likely to see many more examples of this over the coming years, with reports of virtual shopping centres and office districts in development.
However, investment into these virtual worlds is highly speculative and while platforms such as Decentraland do constrain supply, there are already multiple metaverses, with more to come.
In time, platform effects will likely create a premium for some virtual locations, but with multiple metaverses and few supply restrictions, much of the space may in time be void of users and value.
While some have likened real estate investment in the metaverse to buying Manhattan land plots in the early 18th century, it may be just as likely that you’re buying space in a future ghost town.
Impact on physical real estate
The metaverse has the potential to disrupt physical real estate, but we should avoid exaggeration. Disruption is not the same as destruction.
Residential looks well placed to benefit, with potentially more time spent at home for both work and leisure. Indeed, as I found, with space required for the more physical virtual activities, this could support demand for larger apartments.
On the other hand, office may be vulnerable if virtual reality enhances the experience of remote working. While likely working in tandem with physical office, it could accelerate the current trend towards tenants taking less but better-quality space.
Retail, badly affected by the current shift online, may prove more resilient. Today’s retailers are well versed in operating across multiple sales channels, and while the ongoing contraction of physical retail still has some way to run, technologies such as augmented reality could improve the in-store experience.
It may often be the case that the metaverse enhances physical real estate. For example, virtual education and healthcare metaverse applications may contribute to the emergence of new and more efficient services.
The metaverse may support higher education providers in widening their offering across different regions to capture new demand, but this doesn’t necessarily mean reduced demand for in-person learning. We’ve seen little evidence of this in response to the pandemic.
And for healthcare, despite the trend for ageing demographics, the metaverse may replace physical consultations for lower complexity cases; while for advanced consultations, convalescence, and acute treatments, physical demand may again prove resilient.
Environmental challenges
The metaverse will require a huge amount of computing power. Potentially beneficial to the data centre sector, this will require significant energy and could lead to a material increase in carbon emissions.
The University of Massachusetts estimated that the carbon footprint required for training an AI model may reach up to 626,000 pounds of carbon dioxide equivalent or nearly five times the lifetime emissions of the average car.
At the same time, the metaverse may contribute to offset emissions across other parts of the real economy: virtual offices may reduce travel emissions from commuting and improve safety and life quality in urban spaces.
Nonetheless, this does suggest that data centre investors should focus on reducing the carbon footprint, perhaps through investment in renewables, a trend that we expect to accelerate.
It’s far too early to reach a conclusion about the impact of the metaverse on physical real estate. However, when a technology has the potential to influence all parts of our daily life, it would be wrong to ignore the possible disruption, both positive and negative, to real estate investment.
For now though, the biggest risk remains a personal one. It’s not just me that’s been smashing festive decorations. According to Aviva, virtual reality related insurance claims have jumped 30% in a year.
