Virtual land rush is driving up the cost of space in the metaverse

Spurred by fear of missing out on the next big thing, large corporations and institutional investors are gobbling up choice digital real estate, with virtual parcels being bought up almost faster than the environments can be created.

Prices for space in the connected virtual- and augmented-reality environments known as the metaverse shot up last year, with sales of digital property hitting $500 million. The trend could make the virtual real estate industry a $5 billion market by 2026.

Many businesses see digital real estate as an opportunity to market their brands and engage with customers. But some observers say the flood of capital, along with bullish forecasts about financial opportunities in the metaverse, indicate a bubble. 

"The value of virtual real estate, which is not zero in the long term, is certainly hyped and inflated right now by this frenzy of interest that is perhaps out in front of what the technology can actually deliver," Philip Rosedale, the founder of Second Life, a multimedia online world where users can also buy virtual land, told CBS News.

"We have to cross a really big chasm, and that chasm is from what young kids are doing and willing to do in multiplayer games to grownups wanting to be together socially in a virtual environment," Rosedale said. "And we're a lot farther from that than a lot of the enthusiastic folks in the market think right now."

Big brands stake their claim

While a fully operational virtual world where adults can socialize and engage with companies is still years away, more than 200 consumer-facing brands, including Gucci, Atari, Wari Music Group and HSBC, have already purchased virtual land in the metaverse.

"The utility of virtual land is real," said Sebastien Borget, co-founder and COO of The Sandbox, one of four major platforms that deals in digital real estate. The three other major platforms in meta real estate include Decentraland, Somnium Space and Cryptovoxels, together they own nearly 269,000 parcels of digital real estate.

"The possibilities are tremendous because there's no more limits to physics, to imagination, and it makes sense because users want to engage more profoundly with the brand community," he added.

Many companies are using the virtual land to create new marketing channels through immersive experiences, digital goods like NFTs and sponsored content. Borget said "brands will want to be closest to where the users are to keep engaging with them." 

Yet that crucial first step — buying prime real estate in the metaverse — is getting increasingly expensive. 

According to a report from RepublicRealm, which tracks metaverse-related projects, the average price for a parcel of land across the four major platforms doubled to $12,000 during a six-month period last year. 

Just like in the real world, location on the map can significantly impact property prices in the metaverse. A plot of land next to rapper Snoop Dog's virtual real estate in Sandbox reportedly sold for $450,000 in December. Other factors that impact the value of real estate in the metaverse include parcel size and the popularity of the metaverse platform on which you choose to build. 

The hype is drawing in plenty of new users as well as creating renewed demand for crypto wallets. In these virtual spaces, crypto coins are the main currency for transactions, making access to a crypto wallet — a space where converted dollars are stored — essential for participation.

Of the more than 2.5 million registered crypto wallets on The Sandbox, half belong to users who created a wallet for the first time when signing up for the platform, the company said.

Of the roughly 166,000 parcels of real estate in Sandbox, roughly 70% have already been sold to more than 20,000 people, Borget said. In terms of size, a single parcel in the Sandbox is the equivalent of buildable space in the real world measuring 315 feet long and 315 feet wide with 420 feet of height in the real world. Each platform offers varying sizes of parcels that range from 50 square feet to over 400 square feet.

Big money piling in

The growing hype is quickly drawing institutional investors to the virtual space. 

In January, professional services company PricewaterhouseCoopers (PwC), purchased virtual real estate from Sandbox. Last month, HSBC, one of the world's largest financial institutions, also bought virtual land and followed it up by starting a fund to capture investment opportunities in the metaverse. 

"We see great potential to create new experiences through emerging platforms," Suresh Balaji, chief marketing officer at HSBC, Asia-Pacific, said in a statement, adding that it's a branding opportunity for HSBC to engage new and existing customers. 

In addition to The Sandbox, other platforms like Decentraland, Somnium Space, and Cryptovoxels also offer plots of digital land that can be used to build virtual experiences. 

$1 trillion market

JP Morgan, which recently said "the opportunities presented by interactive, digital worlds seem limitless," purchased virtual real estate in Decentraland. The global banking company estimates that the metaverse market will soon generate over $1 trillion in yearly revenue and that monetary risks for businesses that jump in early are relatively low. 

"The astronomical risk of being left behind is worth the incremental investment needed to get started and explore this new digital landscape for yourself," JPMorgan wrote in a January report, adding that virtual real estate gives corporations opportunities to "massively scale."

"Instead of having stores in every city, a major retailer might build a global hub in the metaverse that is able to serve millions of customers," JPMorgan said. 

That's one strategy that Prager Metis, a large accounting firm, is looking to deploy. Prager Metis recently purchased virtual real estate in Decentraland and is in the process of opening a three-story digital building that will serve as its metaverse headquarters.

The company appointed Jerry Eitel, an accountant with over 40 years of experience who also leads the firm's real estate practice, as its Chief Metaverse Officer. His job is to help businesses and individuals navigate the financial challenges of the metaverse real-estate market.

"We're developing a consulting practice around this," Eitel told CBS News. "Look what the internet did years ago, it disrupted so many industries, and this is going to do the same." 

Technical and ethical wrinkles

The current virtual land rush notwithstanding, digital real estate is not a new concept, but goes back nearly two decades. Users can also buy land on the popular multiplayer online platform Second Life, which first launched in 2003. 

Founder Rosedale said Second Life has an economy of $650 million a year, but the average transaction is $2. That "gives you an indication of what we're going to see in the long-term as to the value of virtual goods," he said.

In addition to cautious optimism about the future value of virtual land, Rosedale noted current challenges that platforms have to address in order to scale. One issue is getting a lot of user avatars together in the same place at the same time, he explained, adding that Second Life has only been able to get 100 users together in one place.

He also warned of potential nightmares if advertising becomes the main method of making money in virtual space.

"If the virtual worlds use advertising as a way of monetizing themselves, they're very, very likely to do great harm to people," Rosedale said. He added that body and eye movements that can be tracked through virtual reality headsets reveal levels of information to an advertiser "that you should not be comfortable with." 

"We can't go that way," Rosedale said. "As an industry or as an ecosystem, we can't use advertising as the business model for metaverses."