CBRE’s David Cervantes, Emerging Real Estate Trends in Cryptocurrency & Blockchain

hi and welcome to the podcast on how cryptocurrency and blockchain is impacting real estate and driving change in the wider data center space change is often uncomfortable I can tell you that many of my early interactions with cryptocurrency were also somewhat uncomfortable but amidst all the noise we've seen highly qualified users emerge and start to affect changes that will define this new sector will alter how we see deals for direct power and may even change the wider data center market as we know it i am david cervantes a real estate professional based in montreal canada and a member of CB Ari's data center solutions group our work at CB re spans international markets and provides us a unique viewpoint to global trends I am by nature a curious person especially when investigating correlations between the ethereal horizons of emerging technology and the immovable nature of real property I hope to offer my opinions on how cryptocurrencies and blockchain including but certainly not limited to Bitcoin are now and will continue to affect real property my role is not to convince you or anyone to be an early adopter there are plenty who do and that's not my place instead my team and I observe emerging trends with a focus upon their potential to change our professional environments and upon the pivotal moments in time that drive and further accelerate such change fortunately for us real estate by its nature follows such change with a modest lag providing us with a margin of time in which to observe and respond this discussion is offered to share our observations of the effect of cryptocurrencies and blockchain on real property so that you the listener may choose if when and how you might respond if we consider the global map of primary hubs for the mining process of cryptocurrencies there's invariably a linkage to power at first glance we may correlate the activity to an expensive power then we may appreciate the attractiveness for more greener power but by our observation the real driver is excess power or unused capacity at the generating source of power internationally it is not enough to have cheap power it must be cheap and abundant thus allowing for a marketplace to set in we monitor power costs across our many markets and find our clients gravitating to those regions that can offer power in the range of two and a half to five and a half cents per kilowatt-hour USD but increasingly we're seeing a demand for greater price certainty over a period of time with guaranteed power contracts and now exceeding five-year terms when seeking the link between the demand for mining capacity and the growth of the global mining footprint all indicators point to the contracting of power crypto mining operations the end users of real estate in this industry are required to strike power contracts with utility companies where the power utilities are ready to commit to this sector by way of predictable power contracts we see rampant growth in China for years there had been no obstacles to growth for the large crypto mining firms one year ago for example nearly 80% of the world's crypto mining throughput was being processed out of China utility companies in that region originally only a supplier of electricity to the sector had begun to partner with miners or have become themselves operators of mining this has led to coins actually acting as a unique store of value not in the investment sense but as a store of excess electrical capacity utility companies can tokenize their excess capacity when power is abundant and thus stabilized their profits when power is less so take the major sources of green energy as a leading example solar power is generated in daylight windmills naturally require that the wind be blowing and hydroelectric power generation is most abundant during the seasonal changes in water level maximizing power generation when most abundant can make coin mining seem like a virtual battery saving generated power for a rainy day to offer a window into the global marketplace for space and power as an emerging cost and metric that allows market players to compare and to compete internationally the two variables are full service power cost and full service facility cost now this is a departure from our traditional real estate inputs of dollars of square feet or square meters but it again underlines the importance of power and cost to the sector as opposed to premises area if we add the regional power cost to the facility cost and then compare that figure to markets around the globe we can quickly observe thresholds deemed appropriate by end-users to pursue a deal to provide an example from the wholesale colocation market for cryptocurrency and blockchain we earlier referenced desirable power costs at two and a half to five and a half cents per kilowatt hour USD the market rate paid for wholesale hosted transactions is seven to ten cents per kilowatt hour USD the margin remaining when we deduct the local power cost from the total wholesale cost represents the rent potential of the facility by helping real estate players understand this cost model you bring forth new types of real estate opportunities which may optimize unused spaces or achieve rental revenues per square foot well beyond those achieved by conventional real estate while remaining at or under the maximum budgets predicted by the open market power policy and government regulation has already played a significant role in this sector and will continue to impact the attractiveness of markets real estate is strongly linked to power policy in this sector just as it is in other high power consuming industries like the production of steel for example we may even see the wider data center market become a long-term beneficiary of the changes in public policy brought forth by the market demands of cryptocurrency and blockchain as an example the recorded demand from cryptocurrency miners targeting the province of Quebec in the five months between October 2017 and February 2018 was 18,000 megawatts hydro-québec the publicly operated utility company called for government intervention a moratorium was enacted and new regulations were imposed in order to process and prioritize this demand in order to manage the market the government enacted both an economic development rate to be applied to firms they deemed qualified and a punitive rate of fifteen cents or three times market for any firms found to be operating without permit these new rules sent many end-users scrambling to determine whether they would be awarded permits and dissuaded many others from entry into this new market regulation is thus a threat when a regional government can halt or hike prices of power any market which is open its doors to new demand and who boasts alignment with government becomes a safer destination by comparison a market which is post regulation and/or has government alignment is even more attractive than those markets without any regulation at all site selection for cryptocurrency is gaining sophistication as operators are expanding their criteria beyond low-cost power to now also value predictable and reliable power in the pursuit to stem risk in an inherently risky early phase of this sector regulation if not too heavy-handed can provide a framework for productive deal making so we've defined this new sector by its power density it's thrifty budgetary thresholds and its pattern of stretching the limits of regulation if we closely consider these foundations to the deal-making in the crypto and blockchain sector we may draw parallels to other applications a crypto mind may not have a tremendous amount in common with a Tier three data center but it may begin to closely resemble a quantum computing facility or a rendering farm used to illustrate three-dimensional landscapes for films and video games the growing need for compute capacity at ever lower costs are leading end-users to explore and demand less resilient solutions sectors including crypto and blockchain AI and others need less of the high cost critical infrastructure such as generators and temperature control a trend of self performance may give way to more direct power solutions being offered by our market suppliers the site selection for crypto currency will closely resemble that of large-scale quantum computing and virtual pools of three-dimensional rendering to name only these few so as we conclude I want to leave you with some tips for users and operators when looking to engage with this sector not all regions are created equal the cryptocurrency and blockchain demand will gravitate to regions that have lower power costs but also have abundant capacity for which power utilities are ready to contract secondly power cost and facility costs are inversely proportional where the power cost is lowest the margin for revenue potential at the facility cost is highest if the regional power cost is too high the revenue potential of a particular facility may be extinguished and finally regulation is being applied in many different ways across all markets we advise our clients to be aware of prospective regulation and seek alignment with government power policies and to be part of a long-term solution the cryptocurrency and blockchain sector is certainly real and here for the long term the real estate opportunities are likewise real and require a knowledgeable adviser with expertise and successful negotiation of these deals CBRE brings that to our client base and we encourage you to reach out to us for more information on this emerging space how to succeed and just as importantly what to avoid you

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