Cryptocurrencies and Commercial Real Estate Collide

By now, everyone has heard of Bitcoin, Litecoin and the other multitudes of cryptocurrencies pervading the digital landscape, but most don’t understand what is really being mined, how it is impacting commercial real estate, or why it matters to them.  Regardless of your personal feelings about crypto, the technology is here to stay and will increasingly affect CRE.

First let’s establish what a cryptocurrency is: any digital currency which encryption techniques are used to regulate the generation of units of currency and verify transactions operating independently of a central bank.  The encryption process is known as blockchain, and the people who build the blockchain by verifying transactions and generating units of currency are miners.  The miner, however, is just a computer running a program that solves progressively more difficult algorithms where the reward is a new unit of that currency.

A unique feature of crypto is the entirely decentralized creation of currency allowing anybody with access to electricity, the internet, and the capital to get started to mine new “coins”.  Cryptocurrencies are called coins even though they only exist digitally — there is no physical coin.  Mining is an extremely energy intensive operation.  By some estimates, bitcoin mining consumes more electricity than Switzerland.  That means it generates a ton of heat as a byproduct.

At the end of 2017, it was estimated that there are 1.14 million Bitcoin miners in production, and that the number of miners is increasing at an average rate of about 100-200 thousand per month.  These miners must operate in a structure of some kind.  Some operate in their owners’ basements, in warehouses, old shipping containers, and modern data centers.  The key factors are low cost electricity and the ability to efficiently ventilate heat and cool these machines.  If you are an industrial broker in a state where the average electricity rate equates to a sub $4000/bitcoin production rate, you have probably received a call from a crypto miner.

These miners usually have a great understanding of their business, but they don’t understand the commercial real estate business.  They assume there are buildings of the exact size (usually small) with adequate power (1,000 Watts/SF) and HVAC (hundreds of tons) that they can lease short term.  They like short term leases because the value of cryptocurrencies is extremely volatile, and they don’t want to be on the hook if it is no longer profitable to mine.

Despite this misunderstanding, there is money to be made from the cryptocurrency revolution for brokers, owners, and developers.  Understanding the needs of miners can lead to opportunities.  Enterprising developers are beginning to build facilities specifically designed for crypto miners.  Owners of yesteryear’s empty manufacturing buildings or print shops may have the future’s mining facilities.  Brokers should revisit buildings previously thought to be functionally obsolete, as they might have the characteristics miners need.  Ultimately every miner is trying to have the lowest cost of production, so when they find those characteristics like they did in Eastern Washington state where hydro-electric power rates were $0.025/kWh, a sleepy rural community turns into a boomtown.

Unlike today’s central banks that can create currency with few constraints, the cost of production for cryptocurrencies is part of what gives them value.  If the open market value drops below the cost of production, supply of new coins coming online becomes constrained.  In the case of Bitcoin there will only be a fixed supply 21 million is the total that will be created, and a public ledger to confirm it, so no central bank or government can debase the currency with oversupply.  Like every currency in circulation, what gives cryptocurrency value is the ability to exchange it for other things of value.  In the case of cryptocurrencies, there are additional qualities that enhance value, but we will have to save that for another day.

Already there are condos in Florida priced in bitcoin; Sweden and Vermont, amongst others are exploring blockchain technology for title insurance and recording, and commercial properties are buzzing with thousands of miners paying the rent.  Cryptocurrency is colliding with commercial real estate, and those that figure out how to make it beneficial to both industries will make a fortune.

 

 

 

Matt leads the Lee & Associates Data Center Advisory Group representing owners, operators, and end-users of data centers.  They specialize in helping secure wholesale, colocation, and managed services on behalf of clients achieving lower costs, higher efficiency, and greater data security.

To read more about Matt visit our website.