October 25, 2022

Another Busted Bubble - Exploring The Recent Decline In Metaverse Real Estate

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Over the past few months, the (real) real estate market has been experiencing a steady decline, primarily due to higher mortgage interest rates and disproportionately high prices. In fact, mortgage rates have hit a 20-year high as the Federal Reserve tries to fight inflation and cool down the economy. The high interest rates, coupled with the disproportionately high prices, has dissuaded some potential investors and home-buyers from investing in the market. Interestingly, the recent slowdown in activity is not exclusive to the (real) real estate market as the virtual real estate market may be experiencing a more severe decline than the (real) real estate market.

In late 2021, the NFT Newsroom explored the boom (at the time) in the virtual real estate market. This boom in metaverse real estate saw an influx of cash from enthusiastic investors which sparked an increase in metaverse real estate prices. One high profile example of this was Snoop Dogg's development of a digital replica of his southern California mansion in the Sandbox metaverse. Soon after, the boom began as crypto investors paid exorbitant sums to purchase virtual land near these celebrities. One buyer, known only as P-Ape, spent $450,000.00 on a nine-parcel property next door to the Snoop Dogg parcel.

It's safe to say that these lofty expectations have fallen flat in 2022 as the virtual real estate market, like many other crypto-related assets, has experienced a significant decline in value. According to some models, metaverse land sales, primarily those built on the Ethereum blockchain (including the Sandbox and Decentraland) have plunged by as much as 85%. For example, the average price of lands sold across Decentraland peaked at $37,238 in February 2022, but as of August 1, 2022, those costs had dropped to an average of $5,163. Similarly, the Sandbox's average sale price dropped from $35,500 in January 2022 to around $2,800 in August 2022. Overall, the average price per parcel of virtual lands across the six major Ethereum metaverse projects dropped from approximately $17,000 in January 2022 to around $2,500 in August 2022, an 85% decline. The declining land sale values across these metaverse platforms not only indicate the diminishing user interest in metaverse projects, but also a decline in the overall confidence in metaverse real estate investment returns. For context, P-Ape's parcel in the Sandbox is worth roughly $25,000.

We can say with the utmost certainty that at least one billionaire investor is effectively "out" on metaverse real estate (at least for the time-being) as Dallas Mavericks owner Mark Cuban called purchasing metaverse real estate "the dumbest s--- ever" in an August 2022 interview on the Altcoin Daily YouTube channel. Cuban, an outspoken and well-documented cryptocurrency enthusiast, noted that the declining utility and unlimited volume of metaverse real estate makes metaverse real estate a bad investment under the traditional real estate investment model.

In the world of traditional real estate, i.e., the real world, the reasons for a declining market are relatively simple for real estate analysts to uncover (high interest rates, high inventory etc…). Although metaverse real estate is a new investment, it appears to be equally as simple to understand why the market has experienced such a fierce decline. Waning investment interest and the overall decline in cryptocurrency valuations as a whole appear to be the culprits. Declining confidence in the overall utility of metaverse real estate also appears partially to blame.

Despite the extreme losses, several metaverse real estate enthusiasts remain bullish on the investment. "The vast majority of utility is still there, but it's declined in price for other economic reasons," says Lorne Sugarman, the CEO of Metaverse Group, a virtual real estate company. Sugarman added that he isn't concerned about falling prices, as his company expects to hold properties for years to come as utility increases with adoption. Similarly, and perhaps surprisingly given his recent comments on the matter, Mark Cuban seems to agree that some properties will have value once the community in that metaverse is stronger (i.e. "location, location, location").

It will be interesting to see how things develop in the world of metaverse real estate investing over the next few months and as we head into 2023. In the real world, as interest rates and prices rise, rentals tend to increase. It follows that some business have benefitted from short-term rentals in the metaverse as opposed to purchasing metaverse properties. Additionally, with the low prices of metaverse real estate as compared to last year's prices, we could see another boom in investing if confidence and interest in metaverse real estate start to gain traction, but only time will tell.

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