By now, everyone has heard of bitcoin and the multitude of cryptocurrencies pervading the digital landscape. Most commercial real estate professionals don’t fully grasp the impact it will have on our profession and markets. Regardless of what happens to bitcoin and the like, the technology will remain and increasingly affect commercial real estate.
First, let’s establish what a cryptocurrency is: any digital currency for 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.
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. This allows anyone with access to electricity, the internet, and capital to begin mining new currency units. These units are called “coins” but only exist digitally — there is no physical coin.
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, with a public ledger to confirm that is the total supply created. This prevents a central bank or government to debase the currency with oversupply.
At the end of 2017, there were an estimated 1.14 million bitcoin miners in production. The number has been increasing as much as 200,000 a month. These miners must operate in a structure of some kind and can be found in modern data centers, warehouses, old shipping containers and basements of homes.
Mining is an extremely energy intensive operation. By some estimates, international bitcoin mining consumes more electricity than Switzerland. That means it generates a ton of heat as a byproduct.
The keys are low-cost electricity and the ability to efficiently ventilate heat that’s produced by these powerful 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.
Ultimately every miner is aiming for the lowest cost of production. When those ideal attributes are found – such as in Eastern Washington state where hydro-electric power rates were $0.025/kWh – sleepy rural communities are transformed into crypto boomtowns.
Miners usually have a great understanding of their business but generally no knowledge of commercial real estate. They assume there are plenty of small buildings with 1,000 Watts/SF of power equipped with HVAC capable of moving hundreds of tons of cooled air. And because cryptocurrency values are so volatile, miners want short-term leases so they won’t be on the hook for rent if mining becomes unprofitable.
There is money to be made for brokers, owners and developers from the cryptocurrency revolution. Enterprising developers are beginning to build facilities specifically designed for crypto miners. Owners of yesteryear’s empty manufacturing buildings or print shops may contain the future’s crypto mining facilities. An abandoned 500,000-SF aluminum smelter plant in Rockdale, Texas, northeast of Austin was taken over recently by Bitmain, the world’s largest bitcoin miner and equipment maker. Brokers should revisit buildings regarded as functionally obsolete. They might have the characteristics miners need.
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 save that for another day.
Already there are condos in Florida priced in bitcoin, and the first fully-recorded blockchain transaction closed in California. Blockchain technology is being explored for contracts, title insurance and public registries, and commercial properties are buzzing with thousands of miners paying the rent. Cryptocurrency is colliding with commercial real estate. Those who figure out how to make it beneficial to both industries will mine some currency of their own.