Bitcoin is at an all-time high, topping $40,000 as of Friday afternoon. Real estate, meanwhile, could be better. Some of the world’s largest property owners are trading at 20-50% below their pre-pandemic highs. Many stores are closing across the developed world, most offices are empty, and even apartments are struggling to keep their occupiers.
On paper, physical buildings and virtual currencies could not be more different. Their divergent fortunes in 2020 offer a case in point. But neither of these two asset groups is on paper. They have more in common than meets the eye. And these commonalities offer hope to commercial real estate owners. Let’s see how.
Investopedia offers a summary of the tailwinds behind Bitcoin’s rise.
- Inherent scarcity: The supply of bitcoin is limited. It increases at a slow, pre-determined pace.
- Monetary and fiscal policy: The supply of other major currencies is increasing rapidly. This is due to Governments and Central Banks making it cheaper to borrow and increase their spending to stimulate the economy or backstop the market for various financial products.
- Institutional adoption: In 2020, bitcoin received a vote of confidence from some of the world’s largest investors and financial institutions. Big financial institutions started buying bitcoin. Some corporations started using bitcoin to store their extra cash. A growing number of reputable publications of old-school opinion leaders published articles that legitimized bitcoin as a store of value.
- Lower transaction costs: People bought more bitcoin in 2020 (and 2021) than ever before because it was easier than ever to do so. The ecosystem of digital wallets, trading sites, and publications that supports bitcoin trading is now mature. A few years ago, buying bitcoin required dealing with specialized hardware and complex procedures. Now, it is as easy as sending a text message.
These tailwinds do not mean bitcoin’s price can’t go down. But they explain how the currency managed to get so high and why so many people have started owning it over the past few months.
Many of these tailwinds seem relevant for commercial real estate. Land is the ultimate scarce resource (actually, time is, but that’s a different story). The supply of new buildings increases slowly. Over the past decade, the world’s largest investors increased their exposure to commercial real estate. And technology makes it easier than ever to buy whole or fractions of buildings.
So why is commercial real estate struggling?
Because it’s real, its value depends on the income it generates and on investor expectations about future demand for offices, stores, and apartments. Sudden changes in consumer behavior (people working, shopping, studying remotely) may be temporary, but the uncertainty is enough to make investors nervous.
In the middle of a crisis, the fact that buildings are so tangible makes them vulnerable. Unlike bitcoin, their value is determined by fundamental factors such as net operating income and vacancy.
But what happens after a crisis?
All of the tailwinds listed above will still be relevant. Bitcoin might continue to go up regardless of what happens in the real economy. For now, the currency enjoys the best of both worlds: It is perceived as scarce, and it is perceived as part of the new economy that can only grow in importance.
Real estate is not perceived as a bet on the new economy, but it is still relatively scarce. More important, real estate assets have an advantage over virtual coins: They generate income — cash flow that investors can put in their pocket and use to buy actual stuff (or bitcoins).
In a world of abundant capital, negative interest rates, and rapid change, anything that generates stable income is extremely valuable.
But that does not mean that landlords can wait out the crisis and ride a wave of recovery to untold riches. In a world of abundant capital and rapid change, landlords face immense challenges. They can generate a stable income, but to do so, they have to take more risk than ever before: they need to focus only on some customers rather than trying to build one-size-fits-all assets; they need to develop whole new operating businesses to provide new services; they need to invest in branding and marketing channels; they need to become reliant on a variety of new operating partners and technology providers. And even if they do all this, they have a good chance of failing. If they don’t do any of this, they are almost guaranteed to fail.
But there’s good news too. Landlords and operators that will embrace change, that will take risks, that will have a clear point of view about who their customers are and what they stand for — have a good chance to succeed and generate more income than everbefore from their assets. And financial markets will value this income at much higher multiples than ever before.
So, buy land, repurpose old buildings, build something new. But only if you have the courage to do something meaningful. And it’s ok if you don’t — you can always partner with or invest in someone who does.
Have a great weekend.
- The Q1 cohort of our Future-Proof Office Course is starting in 10 days. We have an amazing group of participants and alumni from across the world. If you’re designing, building, marketing, servicing, or leasing office space — you’re guaranteed to have a great time, learn something, and expand your network. Join us.
- In case you missed my NYT piece from Monday, check it out here.
- Cover photo by Dmitry Demidko on Unsplash