Welcome back to the latest edition of CRE Insiders!

As we embark into another vibrant summer, it’s an appropriate time to reflect on the evolutions not just in commercial real estate but across all financial markets. Last summer, I covered external forces reshaping the investment landscape such as behavioral shifts, negative population growth and artificial intelligence and this past winter, I introduced the concept of the “Exponential Age” defined by the rapid pace of technological change and its profound implications on the world as we know it. In this edition, we are taking another few steps into the Exponential Age and beginning to address a topic that is certain to trigger some and intrigue others—Bitcoin as the once evolving and now real, proven asset and the implications to real estate. Top off your coffee and find a quiet spot.

Historically, people owned real estate for its utility value, characterized by the fact that you can live in it or use it for production. However, that changed in the 1970’s when the Nixon administration ended the convertibility of the U.S. dollar into gold (known as the “Nixon Shock”). Since then, we have been operating in a fiat-based monetary system with floating exchange rates and no true currency standard whatsoever. As a result, real estate has become the world’s most valuable asset class because it serves as the primary asset to store value and hedge against inflation. This era is rapidly coming to an end, leaving investors to grapple with complicated yet profound questions.

Recent developments and analysis suggest and show Bitcoin may be disrupting this longstanding preference. The emergence of Bitcoin as the preferred store of value has barely begun, yet undoubtedly will, shift the financial landscape in a significant manner due to its distinct advantages over real estate:

• Scarcity & Liquidity: Bitcoin’s finite supply of 21 million coins ensures its scarcity, a stark contrast to CRE, which can be subject to fluctuation and overbuilding. Moreover, Bitcoin is now demonstrating superior liquidity, enabling faster, cheaper and borderless transactions without the complexities of physical property transactions.
• Decentralization & Security: Unlike real estate markets, which are often susceptible to local, economic, and regulatory shifts, Bitcoin operates on a decentralized network, providing a global and more stable store of value that is less affected by localized risks.
• Ease of Transfer & Lower Overhead: Bitcoin eliminates many of the traditional barriers associated with property investment, including lengthy paperwork, high transaction fees and taxes, facilitating smother and more cost-effective asset management.

Bitcoin as a preferred or even superior alternative poses serious and complex questions for investors. What is the impact on real estate valuations? How will investors allocate capital now that they have a new asset to choose from? Now, let me be very clear—I am not implying whatsoever that real estate goes to zero. Far from it, actually. However, based upon analysis, statistical trends and today’s growing real-world experiences, I do foresee real estate losing some of the monetary premium it has accrued over the last 50 years. The two asset classes will coexist and ultimately, complement each other in ways that will be accretive to each asset, correct the distortions created by fiat financial engineering and reward investors that exhibit sound investing and pioneering principals.

As the adoption cycle continues and grows, real estate values will likely be reset closer to their utility value. This may seem like a foreign concept, but again, this was the primary reason people owned real estate before 1971—you could live it in or use it for production. This brings an entirely new set of questions for investors to educate themselves on. How do we value utility? How will modes of production change in the Exponential Age? Which types of properties will capture a premium? At this point, I have some ideas but I’m still working through them with proven experts in this arena.

I have been writing about the importance of maintaining and improving assets for the last few years and this is in large part why I’ve placed such emphasis on both the physical and investment valuation sides. Disagree with me? Ask yourself this question: Will the future be more or less digital? The properties that will best withstand these fluctuations and coming needs are those that have been maintained and invested in for the next generation of businesses. A relevant example today, is the Flight-to-Quality that the office markets are experiencing. This means a significant portion of the existing supply will be rendered functionally and/or economically obsolete. If you are not proactive there will come a day where certain properties will be unleasable and unsellable. At that point, the land value is what you have left.

“Location, Location, Location” is no longer defensible. Technology has rendered this, along with zoning laws, insufficient so I’m going to emphasize the 5 categories again: Amenities, energy consumption, modular improvements, technology applications and automation all need to be part of your investment strategy. These categories enhance the tenant experience and improve operational efficiencies which translates into lower operating costs, fewer vacancies, and pricing power. If you own a property built before 1990, you probably want to consider cashing out or exchanging into something newer because the cost and feasibility to reposition will outweigh future returns.

It’s important to keep in mind that this process of “future-proofing” your real estate holdings is not an immediate all-or-nothing proposition. Every property needs a unique evaluation and tailored plan. Every action you take today adds value in the long run. Often, getting started is the hardest part but a necessary one if you are to remain competitive in this market.

At this point, you are likely triggered or intrigued so consider that coffee refill accordingly. All kidding aside, these secular trends are already in motion and there is no stopping them. The disruptions and volatility we are going to see not just in real estate markets but all financial markets as they take greater and greater hold are going to be difficult to absorb. As a real estate practitioner and investor, myself, I have a duty to inform and educate as many people as I can so they can make informed decisions that are best for themselves, their families, and livelihoods. I hope the concepts, concerns, and solutions I present do just this. While I don’t pretend to have all the answers there is one, I am certain on—the winning strategies of the last 25 years will not be the winning strategies for the next 25 years. Plan accordingly!

In future editions, I will introduce a 6^th category that investors and developers will need to have in their toolbox if they intend to be successful and competitive—having a bitcoin strategy. There are various ways to approach it such as treasury management, collateral, maintenance & capital reserves, creditworthiness and purchasing power. I will cover each and encourage your feedback.

Previous Editions:

Winter 2023: Commercial Real Estate in an Exponential World

Summer 2023: Future Proof Your Future

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