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#673: Following The Puck in Real Estate with Chris Drzyzga · TFTC: A Bitcoin Podcast

0:00
Chris, good morning to you on the West Coast. Early afternoon for me. How are you?
0:05
I'm doing very well, Marty. How are you doing?
0:07
Doing well. Excited for this conversation. I mean, we've been talking about the intersection
0:12
of real estate and Bitcoin for a few years now. Right before we hit record, you mentioned
0:17
Leon Wonkham. We've had Andrew Hones on the show and a few others to talk about this. And recently
0:24
we've had some real estate experts that really aren't focused on Bitcoin that have come on. So
0:30
I think this is going to be a good continuation conversation. And you're someone in the real
0:36
estate industry in California, specifically, that has decided to come out and sort of ring
0:43
the alarm bells. On August 20th, you sent out a tweet, that's your pinned tweet, a warning and a
0:49
call to action for the entire real estate industry. Real estate is at a breaking point,
0:53
monetary debasement, 62% inventory obsolete, new financial products competing for capital.
0:59
And so it seems like you're very well ingratiated in the real estate industry. You're a Bitcoiner,
1:05
and you see the writing on the wall of some of the problems in the real estate industry,
1:10
and you think Bitcoin is a potential solution to the problems that exist.
1:14
uh that's absolutely right um you know i i've been kind of watching this uh you know from the
1:23
sideline so to speak you know having a career in the commercial real estate world and being a
1:29
bitcoiner on the side uh for almost a decade now um i joke i i tend to round up i'm probably seven
1:36
or eight years in or so but i'm just watching it and thinking through you know what this means and
1:42
and, you know, the second and third kind of derivatives of the, you know, the disruption
1:47
that's going to take place here. And it's just gotten to, you know, a tipping point where,
1:54
you know, I couldn't sit back anymore and just had to speak up, started to put
1:59
some thoughts down on paper. I kind of been baking a strategy for a handful of years.
2:06
And, you know, the really the last piece of the puzzle was the cash flow piece.
2:13
So, you know, I I've said to others that Bitcoin's CAGR could have been 200 percent a year.
2:19
It didn't matter.
2:21
There was a large segment of the real estate world that was just not going to give it any attention because of that cash flow component.
2:31
And there's obviously arguments for and against that.
2:33
I get it. But when Saylor and Strategy started releasing these preferred offerings that provided
2:40
that cash flow stream built on top of Bitcoin, that was when I was like, oh, boy, here we go.
2:45
Now we got to start talking about this because like it, hate it, whether you understand it or
2:51
not, I mean, these are viable competitors to the real estate industry, not just the bond markets.
2:58
So I just started talking about it. And here we are today.
3:03
And I think it's good that you're in the commercial real estate space because recently we had Melody Wright on talking about residential real estate.
3:12
And I think it's important to draw a line between the two and really highlight the sort of difference of each.
3:21
And we went pretty deep on residential real estate about a month ago.
3:25
And so I think commercial real estate is a different beast, particularly in a post-COVID world where you had everybody rushing to work from home.
3:33
And it seems like a lot of the commercial real estate properties were under stress during that era and still to this day.
3:40
So I guess to take a step back and just talk about the problem before we jump into certain solutions, how bad is it out there?
3:50
Yeah, I mean, that's a good question.
3:52
And the commercial real estate sector in and of itself, I mean, it's vast.
3:57
People tend to paint it with just a broad brush.
4:01
But they overlook the fact of how many different property types and specialties make up the commercial space.
4:11
And each of them have their own dynamics, their own supply demand dynamics that make it up.
4:17
You know, deals get done very differently across each of these product types.
4:22
So there, you know, we could have a podcast, a long form discussion on literally each one of those specialties.
4:31
But I mean, just at a high level, I mean, you obviously have Bitcoin, which is, you know, it's going to is disrupting the industry massively and it's only going to pick up steam.
4:43
But when you zoom out and you start to look at or consider all the other macro forces that are colliding at the same time, right?
4:54
I mean, you cover a lot of them on your pod regularly, right?
4:58
Demographics, technology, AI, automation, robotics, different generational expectations and consumer demands.
5:08
A long-term debt cycle ending a new monetary regime emerging.
5:12
I mean, you stack all these major forces up and then you turn around and look at the commercial real estate markets just in the United States.
5:23
And in the United States, there's about 87 billion square feet of commercial property, just roughly.
5:30
That's the four major food groups, office, industrial, retail and multifamily.
5:36
There's a handful of specialty sectors, but for the purpose of our conversation, let's just say it's 87 billion square feet. 62% of that supply, about 54 billion of it, was built before 1990. It's older than you and I are.
5:53
So that was built in a completely different era, different consumer demands, different business models, all of it.
6:02
So you hold that and then look back at these major forces that are underway and you come to the conclusion very quickly of how much of that supply is functionally and economically obsolete.
6:17
and you start to have an oh oh shit moment um like how how are we going to navigate this and
6:24
the next question you ask yourself is well who owns all of this stuff right and that's
6:31
one of the big differences between residential and commercial right um who owns all this stuff
6:37
if you strip out all the private or excuse me you strip out all the public entities the the
6:43
REITs, what have you. Commercial real estate is owned about 60% privately. It's privately held
6:50
throughout the United States. And that's not including the private REITs, the private
6:56
institutional funds. If you included those, you're another handful of percentage points higher.
7:03
So just looking, just knowing that 60% of the supply is owned privately, that's you, me,
7:08
mom, dad, grandma, grandpa, small operators, business owners, family offices, it's mainstream.
7:16
So that's a huge problem. And, you know, kind of how you started the top of this,
7:23
this discussion was, you know, it's gotten to a point where we have to start, we have to
7:28
acknowledge it. We have to start having these frank discussions about what it means and how
7:33
we're going to move forward. There's a lot of really smart people in the commercial space.
7:40
And if we leverage our collective brainpower, I have no doubt that we're going to make this
7:44
transition a lot more seamless than it could be otherwise.
7:50
Yeah. And I think based off a tweet you sent out this morning and I'll pull it up here to
7:55
so people on the YouTube and Spotify video can see it. Correct me if I'm wrong, but it seems like
8:03
there's an incentive misalignment between tenants and the owners of the building. You say here,
8:09
office reset motion, vacancy remains elevated, tenants are consolidating, decision cycles are
8:13
longer, TI packages are bigger, renewals are shorter, well-located class A with strong amenities
8:18
is still moving, generic space is sitting, and pricing is adjusting. And so you have
8:23
the goals and the incentives of the people that own this property, which is, hey, we need to get
8:28
tenants in and start cash flowing. And then you have the incentives of the tenants where
8:33
they're thinking, okay, is this the best economic decision I can make for my business,
8:38
my family, whatever it may be? And it looks like there's a bit of an incentive realignment,
8:45
particularly on a duration scale, if that makes any sense.
8:51
Absolutely. And I mean, I've been kind of pounding the table to the fact that this is not
8:58
just another cycle, right? I mean, some of the biggest criticism or biggest feedback I'm getting
9:03
from folks online is that, you know, real estate cyclical, you know, we've been here before,
9:10
it's just another down cycle, right? And okay, fair enough. You know, I don't have 40 years
9:16
experience in the business, but you're missing a big piece of the puzzle here, right? I mean,
9:22
Over on top of these cyclical changes, there's some structural changes that are taking place.
9:32
The mismatch between landlords and tenants is just one of those that you're highlighting.
9:40
So whether it's shorter lease terms, in commercial real estate lease terms, majority of them are three to five years in length.
9:48
You can get seven and 10 years on larger tenants, larger properties, but by and large, they're three to five years.
9:57
And there's a lot of capital that is outlaid up front by both parties to get a deal done and to get the space ready.
10:06
So when the tenant base is saying we're not signing a five-year lease because of X, Y, and Z, we need a 12, 24-month lease, that creates a whole host of issues for the landlord and the property and even the tenant.
10:27
So there's some big disconnects there that we haven't really filtered through yet.
10:32
yeah i guess diving into the economics of the the building owners and the owners of commercial
10:40
real estate where it's privately owned or even the big funds i guess distilling this down to
10:47
the first principles explain it like i'm five commercial real estate what what is it what is
10:54
their goal at the end of the day what is their time frame how much of a return are they typically
10:58
looking to make? I mean, you can have timeline hold periods as short as three to five years. I
11:06
mean, that's really the bulk of it the last 15, 20 years. And that's how you're really making
11:13
your returns and turning a profit is those shorter compressed hold periods. You're not
11:19
necessarily buying the properties for long-term holds into cash flow because these things are
11:25
only spitting off four or five, 6% in cashflow. So if you're going to, you know, again, outpace
11:32
inflation, outpace debasement and, you know, turn a profit, you're making it on the exit.
11:39
So three to five years is the short period, the majority of the period, I should say. And
11:46
there's some core assets, some core plus assets that are longer term holds, 10 years plus,
11:52
But those are, you know, you have a very different tenant profile.
11:57
You have a very different end user in those properties.
12:03
So three to five years, they're basically looking to get their nut on sprucing up the place and flipping it to somebody else.
12:09
Yeah, exactly.
12:11
And you're, I mean, at the end of that whole period, you're looking maybe high teens on a return.
12:16
I think that's kind of what you're looking for there on your question.
12:18
high teens, low 20s are few and far between. If you get into the spec development world,
12:27
you're mid 20s, but you're also taking a lot more risk. There's a lot more expertise and
12:33
experience that's needed in those transactions. So yeah, high teens is what you're looking at.
12:42
And again, I mean, that's where you come back to Bitcoin as the hurdle rate. It's like,
12:47
At what point do these LPs, some of these less experienced operators, just see the light and say, hey, I'm going to allocate this capital to other assets?
13:03
I think this transition is going to be – there are some good things that are going to happen from this transition.
13:10
I don't want to be a total doer on it because that's just not who I am.
13:17
But I mean, I think the disruption is going to flush out a lot of malinvestment that we've had over the years.
13:27
And it's also going to separate the pros from the amateurs.
13:33
But I mean, there are a lot of people running around pretending like they are sophisticated real estate professionals.
13:39
And, you know, when now that the market conditions have changed, interest rates have gone up, cost materials and labor.
13:46
I mean, they don't know how to to navigate these markets.
13:49
So the folks that don't have the edge, they don't have the expertise, they don't have a strategy.
13:56
They're going to get flushed out. And those that remain, they're going to have to have a comprehensive strategy that they apply to every asset or across the portfolio.
14:08
if they're going to remain competitive and relevant and profitable.
14:13
I mean, in my world, the big buzzword is we have a value add deal.
14:19
And value add, when you strip away all the lipstick there, right?
14:25
Value add just basically means we're buying a property.
14:28
We're making some minimal cosmetic upgrades.
14:31
We're pushing rents.
14:33
Maybe we'll rename it.
14:35
We'll rebrand the property.
14:36
and then we're going to flip out of it for a multiple in a few years, right? We're not really
14:41
adding any value to the property. And I think that game is coming to an end as well. So again,
14:50
those that are remaining in the industry, they have to have an edge. They have to have some
14:55
sort of strategy. And I'm not pretending like I have it all figured out, but I've put a lot of
15:02
thought into what that strategy looks like. And that's kind of what I've been talking about online
15:07
is these four pillars that real estate operators have to execute on if they going to be successful And the first one is I call it your Bitcoin strategy but you can call it your capital strategy whatever you want
15:23
And the Bitcoin strategy consists of a couple of things. One is your, you know, what percentage of
15:29
your US dollars are getting allocated into Bitcoin? That's question one. Question two is,
15:38
I can also see a scenario where your US dollars are being held in a vehicle like stretch.
15:44
Right. So you're being really intentional about how you're holding your your capital.
15:51
The second pillar or the second category in that that Bitcoin strategy are your loans and financing mechanisms.
15:59
Right. And you've done a great job of talking about the dual collateralized loans and these long duration credit products that infuse Bitcoin.
16:08
I'm really excited about that. I think that's going to be a natural onboarding transition mechanism for the industry at large. So I'm excited to see where that's going. And the third piece of this capital strategy is how you're raising equity.
16:27
And that comes down to understanding or at least acknowledging that your competition is just not your immediate sub market. It's not the building across the street, right? It's spot Bitcoin for one. And it's these adjacent products that companies like strategy are putting out.
16:44
because again, like it, hate it, whatever your feelings are on them, there is a percentage of
16:51
capital that's going to naturally migrate into these other assets as adoption grows,
17:00
as awareness goes, as these financial advisors across the country get educated
17:04
and incentivized to put them into the boomer's portfolio, there's going to be a significant
17:10
good percentage of real estate owners, they're going to say, Hey, I don't need that, you know,
17:14
apartment building anymore. Right. I don't need the tenants. I don't need the termites, all of that.
17:19
And they're going to go for that, you know, less management intensive vehicle.
17:24
So that's one of the pillars. The other one is your energy consumption,
17:28
right? I mean, depending in commercial property, energy is about 30% of your operating expenses.
17:36
It'll fluctuate property to property, but that's a good benchmark is 30%.
17:42
And in most markets, all markets, all property types, your energy the last handful of years, last five, six years is increasing double digits, which far, far outpaces your fixed rent escalations.
17:57
escalations. So if you're going to streamline operations, you're going to keep that NOI
18:03
robust and durable, you have to optimize that energy consumption any which way you possibly can.
18:12
And most of the industry knows about the basics, right? Window tents and films and sensors. There's
18:19
all these IoT devices now that'll reduce overall consumption, solar panels, battery storage,
18:26
But now forward-looking real estate owners have to start thinking about Bitcoin mining, right?
18:35
And how do you integrate that into the asset or across your portfolio?
18:40
When you do it effectively, you're not only subsidizing, you're not only able to subsidize the energy cost, but you're taking an expense line and turning it into an income stream.
18:50
When you do that on a large property or at scale across a portfolio, that's not an incremental improvement. That's a step function improvement in your operational efficiencies.
19:04
and you know i i need to kind of preface this by by acknowledging that you know bitcoin mining into
19:11
these building systems is still very new there's a lot of changes going on and a lot of innovation
19:16
taking place but at the same time it's moving a lot faster than most people realize it is and i
19:24
mean i'm also not an energy expert by any stretch but as a real estate person i see these three
19:30
industries, these once separate industries colliding, right? You got real estate, you got
19:34
energy, and now Bitcoin, tech, however you want to put that last one together. But they're
19:42
previously separate, now they're colliding. And when you apply it to this real estate asset,
19:48
it's taking this single purpose, this single use, monolithic, depreciating asset,
19:55
and turning it into this financial machine that's resilient and positioned well for the 21st century.
20:04
I mean, if that doesn't get you out of bed every morning as a real estate operator, I don't know what does, right?
20:11
So I'm really excited to see what happens in that particular area.
20:18
The third category and the fourth category, the third category is tech integration, right?
20:23
how are you integrating technology into the asset or across a portfolio? And technology helps you
20:31
accomplish two things. One, it helps you provide a superior user experience, a superior customer
20:38
experience, and it helps you streamline the operational efficiencies. We can have an entire
20:44
podcast on the topic of prop tech. That's what it's called in my world. But again, it's allowing
20:52
you to create conveniences and amenities for your tenants if they become very sticky.
20:59
That's very, very important.
21:01
The second piece of it on the operational side is you're able to get real-time data,
21:08
make decisions faster, inform decisions at that faster, which ultimately keep your costs
21:16
down and extend useful lives of building infrastructure.
21:20
So that's very, very important. And the fourth category, and I'll stop talking here, has to do with modular improvements, right? If renovations and tenant improvements over the last decade, they've increased 100% across all product types, across all markets.
21:38
And again, if you're working on three to five-year lease terms with these tenants and you're spending five, six figures every time a tenant moves out just to get ready for the next guy, that's terribly inefficient from a capital perspective.
21:56
And then you look at it.
21:57
This goes back to your earlier question, too, whether you have a mismatch and incentives.
22:00
The landlord foots the bill a lot of the time for those improvements.
22:04
and oftentimes they're break-even points not until month, somewhere between month 20 and 25,
22:11
generally speaking. If you have a big TI job, it can be well into the third year of the lease.
22:18
So again, if you're turning over these units and dumping large chunks of capital into them every
22:24
few years, in the world that we're going into, that is a very bad idea and you have to figure
22:31
out how to optimize that. And fortunately today we have modular improvements that are getting a lot
22:38
better. They're applicable here. And from the owner's standpoint, it allows you to appeal to
22:44
a broader audience, right? More tenants at once. And then in addition to that, you can carry,
22:50
there's a residual value component that you can maintain through time and across multiple tenants.
22:57
That's significant capital, significant dollars that fall straight to your bottom line.
23:01
So again, just to kind of put a bow on all this, if you're going to be a real estate operator,
23:06
you know, through the end of this decade and into the 2030s, that old value add strategy,
23:12
you know, letting appreciation do its thing, that's gone.
23:15
Don't do that.
23:16
Don't give your money to that investor.
23:19
That's a bad idea.
23:20
They have to have a comprehensive strategy that they're going to execute on the asset
23:25
or across a broader portfolio, full stop.
23:27
that was a fire hose of information i've been here taking notes and it makes a ton of sense
23:35
yeah i mean i think this intersection we said like energy real estate bitcoin whatever you
23:41
want to call it tech is certainly happening and i think capital efficiency is the name of the game
23:47
as we get into this sort of debasement trade reality and obviously i think bitcoin is going
23:54
to be a crucial part of anybody's tool set, not only in real estate, but like bringing this back
24:01
to the top of that fire hose, going back to the question of where are you holding your capital?
24:07
You said that micro strategy stretch, the preferred offerings with yield are very appealing.
24:14
But just to paint like a full picture for people, what is the typical
24:17
sort of practice of real estate investors or property owners, what they do with their cash
24:23
low and the cash in their bank account and they're just buying treasuries are they going into money
24:28
market funds what are they doing yeah i mean it it's it's all the above right checking accounts
24:34
t-bills money market funds just short duration um vehicles that are you know perceived as safe
24:41
and you know throw off a little bit of yield um but again i mean again maybe this is my the
24:46
big coiner in me i'm you know looking at these products and you just kind of look at some of the
24:51
highlights, senior in the capital stack, over collateralized by five or six times,
25:00
liquidity, all of these things. I personally would put my trust in the management team over
25:12
at strategy than I would the clowns in Washington, because we all know where that goes.
25:18
We all know what happens there. We've seen that movie.
25:22
Yeah. And I'm actually like instead of misalignment, I mean, I think it's top of everybody's mind.
25:30
Maybe not everybody's, but it's a big theme right now.
25:35
The relative unaffordability, unaffordability of real estate.
25:41
And when we're talking about like incentives of the owner specifically, whether it's an individual or a fund,
25:47
And they need the value of the asset, the real estate asset to go up to sort of make their nuts.
25:54
And so they're highly incentivized to push the price up and bringing us back to what you mentioned about these dual collateralized structures.
26:02
structures. That's why we're supporting battery finance at 1031 and why we're very bullish on the
26:09
strategy overall, not just for them specifically, but people that are tenants of commercial real
26:16
estate properties or residential real estate properties, because you sort of give the owners
26:21
of these properties a reprieve in the sense that they don't need the equity value of the property
26:27
to go up a certain percentage every three to five years.
26:31
If it's dual collateralized, they can let Bitcoin do some of the work of equity value accretion.
26:40
Absolutely.
26:41
I mean, I think it comes just to distilling that down for the average real estate person
26:47
is you have to explain to them that this is a new tool, a new innovation that's complementing
26:54
the real estate asset.
26:55
right if if your livelihood and your business is you know in and around real estate that's
27:01
fantastic good right i'm not saying sell all of it and you know run to the hills learn how to
27:06
homestead that's not what we're talking about here right you have a new tool that improves
27:12
the asset that you know inside and out right why would you not learn it why would you not
27:18
figure out how to integrate it into the into the operations into the asset plain and simple
27:25
yeah and it's not only i think the benefit of adding bitcoin to the collateral package is
27:34
twofold maybe more than twofold but i can think of two very good reasons off the top of my head
27:39
obviously bitcoin's cagger um again it can help you increase the equity value of that collateral
27:45
package um quicker arguably than you would which you're just depending on real estate alone but
27:51
And then liquidity, which you mentioned, too. I think the liquidity component is very underappreciated.
27:56
The ability, if God forbid something goes wrong, to get part of your principal back immediately.
28:04
Yeah, absolutely. I mean, it's whether it's the loan piece or the treasury piece that we're talking about.
28:12
When I'm talking with real estate owners about this topic, bringing the conversation to where they're at, right?
28:20
meeting them where they're at, right? Why should you hold Bitcoin on your balance sheet? Well,
28:24
you can improve your purchasing power. You can build and maintain adequate reserves for CapEx
28:32
and maintenance and emergencies, right? And then you're going to improve your credit worthiness
28:37
over time, right? That's something that the real estate owners get, right? They can get on board
28:43
with that. And that's just the treasury component, right? Now you add in the loan component,
28:50
And the conversation just continues from there.
28:55
Well, on that note, since you've gone public and I'm sure you've been talking to this to many other people outside of your audience on X, how has this pitch been received by people in your industry?
29:11
It's it's been mixed. It's been very mixed.
29:14
I, you know, that said, I have been pleasantly surprised at the at the feedback.
29:21
There's a lot more curiosity and receptiveness than I initially expected, which is positive.
29:31
I mean, I've had people reach out from across the country in all different areas of the industry.
29:38
Right. Brokers, lenders, fund managers, contractors. And the conversation with those guys goes one of two ways. The first one is, oh, my God, thank you for saying this. You know, I thought I was the only one, which that's that's an easy conversation.
29:56
And the second piece is, this is really interesting. I see where you're going. Tell me more. Those are the positive feedbacks. The negative feedback, I mean, again, I mentioned earlier, this is a cyclical business. We've been here before. If you're into Bitcoin, why don't you just go buy Bitcoin? Just dismissing it.
30:19
Right. So that tells me that there, you know, that education gap is still very, very, very wide.
30:26
And we have to do everything we can to to narrow that gap Well on that last point that the most common negative feedback that I get is all right why don we just use the cash to buy Bitcoin Why do we need to dual collateralize it
30:41
Why does the real estate company need to hold it on the balance sheet themselves?
30:47
And again, what you said earlier, like a lot of people, a lot of hardcore Bitcoiners like sell all your real estate, like get out of it, just buy Bitcoin.
30:55
But it's like, no, we actually need businesses and properties that these businesses actually operate in to provide goods and service to the economy.
31:04
So there's got to be some sort of middle ground or bridge that sort of connects these two worlds.
31:10
You can't just throw the baby out with the bathwater.
31:12
You can't just everybody dumps all their assets, buys Bitcoin and thinks the world's going to be fine.
31:16
It's not how it works.
31:18
Exactly. And I say very, very frequently, right?
31:21
I'm not saying that real estate's going to zero.
31:23
Right. Far, far from it. Right. It's it's it plays a vital role like you're you're alluding to in human society by shelter, business, community, culturally.
31:35
I mean, pick pick one. But to perceive like it's business as usual, like it's just another cycle and, you know, things are going to work themselves out.
31:46
that is a very, very, very dangerous approach. And to think that, you know, because you bought
31:55
properties in the last cycle for four or five, six caps, and, you know, when the cycle comes
32:00
full circle, you're going to be able to exit that property at similar cap rates and, you know,
32:05
go about your business. I think that's incredibly nearsighted. I also think if you think that you're
32:13
again, going back to that inventory issue we have, right, of 62% of it being built before 1990.
32:19
If you think those properties are all going to trade at a premium with the trophy assets and
32:27
the class A properties, again, I think you're incredibly nearsighted. You're not looking at
32:32
the entire game board objectively. Well, on that point of the sort of dated inventory,
32:41
What do you think happens with that or needs to happen? Does a lot of it get demolished? Does a lot of it need to be bought and completely gutted and renovated? Or what's the solution there?
32:52
Yeah, that's a tough question because it varies so much by market and property type. But generally speaking, I would say, yeah, there's a lot of just small parcels, small properties, whether they're funky shapes or inefficient layouts, they largely need to get demoed.
33:15
They need to be redeveloped.
33:18
If someone will come in and assemble multiple parcels to get some scale and build something new, that's how I see that going down.
33:28
But that's going to – if you don't get some of the local municipalities on board, right?
33:34
I mean you're just stuck in a regulatory quagmire for years.
33:43
I mean, that's one of the things that disincentivizes a lot of that activity from taking place.
33:50
I mean, especially since COVID, there should be there's a fair amount of redevelopment and demolition going on across the country, but not nearly as as much as it should be.
33:59
And I always come back to, you know, the regulatory burdens that are there. I mean, the time and the cost that it takes to get through zoning and planning in any one of these municipalities, whether the state is red or blue, is it'll follow your mind. Right.
34:20
And along that entire way, you have to have a team of people that are ushering it through the process, right?
34:27
There was so much education.
34:29
There's so much Q&A that takes place with the planners.
34:34
So it's not just a set it and forget it, fill out an application and wait for the decision.
34:40
I mean it's very, very proactive to get through some of these city governments.
34:48
Yeah, I forgot to mention my OG intersection of Bitcoin and real estate guest Kelly Landon, but we spent a whole episode many years ago, probably three years ago now at this point, just on the zoning and planning requirements.
35:04
And it seems like that's something that needs to be completely raised to the ground.
35:08
and we thought.
35:12
Just in my day-to-day business,
35:15
in commercial real estate,
35:16
you always have to know
35:17
what the underlying zoning is for a property, right?
35:20
Because that essentially dictates
35:21
what can and cannot go on a particular location.
35:24
So I'm a lot more familiar with the city zoning
35:29
than I ever thought I would be.
35:31
And where I'm at in Southern California,
35:33
I mean, I play in probably a dozen different cities.
35:38
I mean, these zoning codes are 500 pages, you know, each city.
35:42
And there's, you know, footnotes here and nuances there and asterisks there.
35:46
I mean, you've got to have a, you know, an AI just for that particular city to get through the zoning code.
35:53
And at the end of the day, the guy just wants to know if he can do manufacturing at the location.
35:58
So it's, yeah, it's, that's a whole other topic in and of itself as well.
36:05
But I mean, I think about online, I've been using the word devaluation, right? I've been using
36:14
devaluation a lot. And, you know, I will admit, I'm, you know, I'm trying to get a little bit of
36:18
a shock and awe factor, right? You know, get your attention to some extent. I think about
36:22
devaluation versus the, you know, the melt up scenario, right? And in the, you know,
36:28
in the short term, I think it'll be more of a melt up situation, but there's going to come a
36:35
point in that process where there's no marginal buyer for the bottom 75% of the stock. And I think
36:45
we saw the very beginning of this in the 21-22 cycle, there were 50, 60-year-old properties
36:53
trading at figures that were just absolutely bonkers. So if and when you see that melt-up
37:01
process occur again, where's that ceiling? And, you know, when you hit that ceiling,
37:08
you know, it'll take time for the sellers to adjust their expectations and, you know,
37:14
values of fall during that time. How long does it take? I don't know. Real estate moves a lot
37:19
slower than, you know, global markets or anything in our digital world. But my fear there is,
37:27
you know, by the time that a lot of those legacy owners realize what's going on there,
37:33
the train's going to have left the station. And at that point, you know, what is the value of the
37:38
property? You know, I mean, you have land value. I mean, so you can kind of look at it as a,
37:44
you know, a little bit of a built-in stop loss if you have value in the underlying dirt.
37:49
But again, on a lot of these older assets, these older properties, they're small parcels.
37:54
unless you can assemble multiple and get you know get some scale there's not a whole lot of residual
38:01
value there yeah i'm being reminded of sort of the shock and all devaluation headlines i've seen
38:12
denver get a couple buildings go for a few million dollars and they're sold for nine figures not too
38:19
long ago, I believe Baltimore, D.C. area, similar things, even Manhattan. Some of these properties
38:24
are being sold at an 80% discount to their last purchase price. It seems like there definitely
38:31
are pockets of the market where this devaluation is starting to happen.
38:36
Absolutely. I mean, there's been some incredible data points hit the headlines. I mean,
38:43
you're alluding to a lot of them. We've had a handful of them in my market here in Southern
38:47
California. Again, I think that's good. You know, get those bases to reset. I mean,
38:53
if you're an active participant in the real estate world and you had, like you should be
38:59
buying, the only properties you should be buying now are you need to buy them out of bankruptcy,
39:04
right? Courthouse steps, pennies on the dollar, get that basis as low as you possibly can,
39:11
or buy it significantly below replacement costs, right? If you can do that, then I think you have
39:19
a path forward, you know, long, you know, over the next five, 10 years, but that's also the first
39:25
filter, right? Once you buy the property, if you can get a great location, great asset, attractive
39:31
basis from there, you need to implement, you know, a strategy similar to what I laid out
39:37
earlier, right? Because if you don't do those things, you're not proactive about
39:42
the operations. I don't care how great the property looks on paper, you will struggle to compete
39:51
in the years ahead. So that's how I kind of see it is, you know, if you want, if you insist on,
39:58
you know, buying real estate now, make sure you're looking in some of those
40:03
those areas.
40:07
That's that begs the question, like how many buyers are in a position to actually do that
40:11
versus those that are fully allocated and sort of stuck with the portfolio that they've
40:18
already built?
40:20
I'm actually really glad you said that.
40:22
I mean, and before I go into that, I mean, the.
40:26
What you just described, right, how many people can actually do that, right?
40:30
That goes back to one of my earlier points, right?
40:33
We're going to separate the pros from the wannabes, right?
40:36
If you're buying a property off Zillow, off LoopNet, whatever, mass marketed, that one's
40:42
going to struggle, right?
40:44
And I'm saying this to my own detriment.
40:46
I mean, I'm a broker.
40:47
I do leasing and sales of office and industrial properties.
40:50
But you need to have the foresight and the understanding of how to buy these assets below
40:58
their fair market value, right?
41:03
So that's my two cents on that. But as far as these operators that have existing portfolios, they have existing obligations, that's a tough sell.
41:15
There's some operators, some big time capital that's coming into these major markets, gateway markets, you know, large metros, mine being one of them here in Southern California, where they don't have any of those existing obligations to worry about.
41:33
They got a couple billion dollars in cash and they're ready to deploy it.
41:39
And, you know, if you find yourself in that situation, then that's a really, really incredibly strong place to be in.
41:47
And I definitely think you have a path forward there.
41:50
Absolutely.
41:52
One thing you said earlier.
41:54
Have to have discipline in what you're buying.
41:56
Have to have discipline in what you're buying.
41:58
Yeah.
41:58
And bringing this back to the sort of intersection of Bitcoin in the market that you play in, one thing that you said earlier that was encouraging is that you've had a bunch of people reach out from different parts of the industry, from brokers to buyer sellers, contractors, developing companies.
42:17
And that's encouraging because if each of these individuals or individual entities in these different part of the markets begin incorporating Bitcoin, it sort of de-risk them all at the same time, in my mind.
42:31
if they each get Bitcoin on the balance sheet or incorporate it into their part of the industry
42:38
in the way that that's best suited for them.
42:41
You can see like a collective strength building up where it's easier to do deals and people
42:47
don't feel like they're taking on too much risk because they have this
42:51
safety net, for lack of a better term, in their Bitcoin exposure.
42:57
Absolutely.
42:58
I mean, you can draw those same comparisons in the lending space, right, with what battery is doing.
43:05
And, you know, those that have the dual collateralized loans, they're going to fare a lot better than those that don't.
43:12
And when those properties that don't have that Bitcoin exposure go bust, that's going to be the batteries of the world are going to be the players that can swoop in and get properties at good basis.
43:26
same thing with the development community i mean there's going to be for the developers that you
43:32
know have a war chest um of you know of bitcoin there's going to be some incredible opportunities
43:39
for them over the next handful of years to um acquire market share absolutely
43:47
um and it's kind of i was thinking through i haven't i have been thinking through this one
43:53
a little bit. You have the Bitcoin cycle, right? I mean, obviously some people are arguing that
44:00
that four-year cycle's over with, but whatever your opinions are there, you have a Bitcoin cycle
44:05
and you have a real estate cycle, right? And over this arc of time, they're colliding, right? So
44:13
I almost see you in the point of the cycle where you're in your Bitcoin accumulation phase
44:21
and your education phase, right? So accumulate as much Bitcoin as you possibly can and educate
44:27
yourself on what these various components of a strategy can be, right? And as you're doing that,
44:36
you need to have a, you know, do an assessment of your holdings, right? Figure out which assets are
44:41
core and which ones aren't. The ones that aren't, sell them. Get rid of them. Doesn't matter if you
44:47
take a slight discount on them or not. Get them off your books, get that liquidity. And I see this
44:55
kind of period of cycle going from today to maybe 2030, 2032 on the long end. And then from there,
45:02
you start deploying your war chest. You start implementing the strategy. Hopefully you've
45:07
acquired some stuff between now and then. And you have a handful of doors. You have a handful of
45:14
buildings to go execute the strategy on. That's not a fully baked idea, but you just kind of,
45:22
you got my wheels turned there as you made some of those comments. But I'm kind of seeing those
45:27
things collide again. Yeah. And well, what you were talking earlier on the subject of prop tech,
45:34
make tenants sticky, get you better data. I don't think this applies to those two points
45:40
that you may, but you look at something like Square did last week
45:43
with the integration of Bitcoin
45:47
and their point of sale systems And if you a property developer particularly for commercial real estate that catering to retail businesses it like huh maybe you lightly nudge the tenants to use Square terminals
46:02
and educate them about Bitcoin to sweep a portion of their cash flows
46:08
into Bitcoin using the Square terminal.
46:10
Because that's the tenant risk for you.
46:14
So I love where you're going with this.
46:17
Play that out one more step, right?
46:19
In commercial real estate, a large part of the value that people pay, the multiples people
46:25
pay are based on the tenant, right?
46:29
It's not 100% on the property itself.
46:31
It's on the quality of the cash flow, right?
46:34
So in our world, we talk about credit tenants, right?
46:37
If you've got a bunch of credit tenants, that property is going to go for a premium relative
46:41
to a property that doesn't.
46:44
And as you know, if you can, if you have this retail center, this strip center where you can lightly nudge or incentivize your tenants to learn and accept Bitcoin, how does that property trade in the marketplace when you go to sell it?
46:59
If you have a retail center that's got however many tenants it is, but those tenants hold Bitcoin on their balance sheet and you have the exact same property where those tenants don't.
47:12
How does the market assign a risk to that?
47:16
Those two properties, how do they assign a premium?
47:19
That one's going to be really fun to watch play out.
47:24
So stay tuned on that.
47:25
You have to have me back for when that actually happens.
47:28
And I'll bring all the data points and analysis for you.
47:33
Yeah, because I think it's very underappreciated what they launched last week.
47:38
Four million small, medium, some large size businesses across the country with the ability to do this automatically as of last week.
47:48
who knows what the uptick on adoption of that particular feature within the point of sale system
47:54
will look like but you can imagine a world where slowly but surely it starts at five percent grows
48:00
to ten and maybe fifty percent of square merchants are sweeping at least ten percent of their revenues
48:06
in the bitcoin and it's going to be incredible the amount of data that many people have four
48:13
years from now to make decisions off of. And I think the one thing I wanted to say earlier,
48:19
or a question I wanted to bring up is, and this is something I've been beating the drum about,
48:24
particularly in relation to this, the square launches a bunch of people,
48:29
particularly in finance and in real estate and other markets are sort of pointing at the treasury,
48:37
the Fed, the Trump administration saying, don't worry, they're not going to let things go to shit.
48:41
And I think that sort of consensus view on how we're going to, quote unquote, fix the problem is short sighted and people need to adopt sort of creative, bold solutions that are sort of external and inoculated from from the whims of the political class.
49:01
I agree with you 100 percent.
49:04
I think it's incredibly short sighted.
49:06
I think the the the market, you know, the the players in the market have all been, you know, conditioned for at least the last 15 years to believe that the you know, the Fed's not going to allow another a real down cycle to occur.
49:23
Right. I mean, the Fed put, you know, comment has I mean, it's everywhere.
49:29
And again, I think that's incredibly dangerous.
49:33
I think it's nearsighted. But, you know, when you play and again, when you play this out, let's just say that they do jump in.
49:41
They jump in, they backstop it, you know, no problem. Right. We're business as usual.
49:50
One, we've seen the inflationary impacts of that, but that's I'll leave that on the side for now.
49:55
But if if they do that. Their only tool is interest rates, right?
50:01
I mean, interest rates aren't reversing demographics. They're not reversing AI and automation, robotics, right, from reshaping business models and broader society.
50:15
They're not they can't change the mobility of labor.
50:20
They're not going to change the rise of Bitcoin as a store value.
50:24
Right. So all of those things are outside of the Fed's control.
50:28
There's structural changes taking place in the market. And this goes back to, you know, what I said earlier is this is not just another cycle.
50:37
Right. This is a there are structural changes taking place, which is why you can't assume that this is business as usual.
50:43
Oh. And with that in mind, I mean, you've given a rough playbook, but for anybody listening who's in commercial real estate, what is the lowest hanging fruit? What is the first step? What is the game plan to begin thinking about this? Because we've been going for 50 minutes, and I'm sure for a lot of people, it's overwhelming.
51:08
But from your experience, what what do you what would you advise in terms of?
51:14
All right. You are curious about this. You think it may be a good idea.
51:18
What do I do first? What do I do next?
51:21
Yeah, I mean, the the first first step is just, you know, putting your ego aside and getting educated.
51:27
Right. I mean, I imagine that a lot of people, you know, listening to your channel are already there.
51:34
But, you know, for the real estate professionals that maybe aren't start start getting familiar with Bitcoin, start the learning and the education journey.
51:48
And as you get that, the first step is to buy some Bitcoin, you know, allocate some of your U.S. dollars to Bitcoin, hold it in self custody, experience what that is like.
52:00
right i mean you you should have the butterflies in your stomach when you you know export or send
52:07
your your sats from the the exchange to your wallet that first time and they don't show up
52:12
instantaneously right i mean you should be having an oh shit moment did i do something wrong is it
52:16
gone forever have that experience go through the process and start slowly accumulating a bitcoin
52:24
coin position. Once you get there, now all those other avenues that, you know, we covered here
52:30
today, you know, start to, you know, be are on the table and you don't have it all in one afternoon
52:38
either. Right. I mean, this, like I said, at the top of the hour, I mean, I've been baking,
52:42
you know, this, everything I've said here, I've been baking for half a dozen years.
52:47
Yeah. Well, on the other side of that coin, what would you like to see in terms of products,
52:54
services from the Bitcoin industry would make this roadmap easier to go and tackle?
53:02
Oh, good question. I mean, obviously the point of sales for certain tenants is a big one, but
53:10
in the commercial world, I think the lending area is probably the lowest hanging fruit.
53:18
Since I've been talking about all of this, the number of questions and inquiries I've gotten
53:23
from people across the country, different products or different, excuse me, different
53:28
property types, different sizes.
53:31
Where can I get one of these Bitcoin credit structures?
53:35
Where can I get this dual collateralized loan?
53:38
Right.
53:38
And currently, you know, you can't, it's only reserved for a certain segment of the
53:44
market, right?
53:44
You have to have a certain size of the property.
53:46
So I think there is a lot of opportunity in the middle and lower middle market to provide
53:53
some of these lending solutions. Yeah. And that's just having been on the front lines of that. I
54:02
think the big nut to crack there is to get institutional capital to take the plunge to
54:07
actually deploy into these strategies, which is definitely beginning to happen.
54:13
Not in earnest, but it's one thing that blows my mind, not even thinking about
54:18
the dual collateralized, just simple Bitcoin collateralized loans for US dollars. If you look
54:23
at the rates across the board for the companies that are doing it right, not using DeFi, putting
54:28
it multi-sig, not re-hypothecating, the fact that it's double digits or just below double digits is
54:34
insane to me when you consider the risk profile, considering the collateral sits in a wallet that
54:39
can be liquidated 24-7, 365. And if you're putting dollars at risk, the risk that you
54:45
actually lose your principal is extremely low. I'm surprised that the rates haven't come down
54:51
faster as well. That was one I got wrong. I thought the rates would come down and you'd see
55:00
a lot more of it sooner than we have. I mean, a positive thing, high signal, as you say,
55:07
the fact that Batteries Deal and Philly there, they got awarded the CoStar
55:14
multifamily deal of the year or developer deal of the year in that market. And CoStar,
55:23
if you're not familiar, they're like the primary data source database for commercial real estate.
55:29
Anybody in commercial real estate has a subscription to CoStar. So they're the monopoly.
55:36
and for an incumbent like CoStar to issue that award and draw attention to that deal,
55:48
that was very positive.
55:50
And I've shared that with a lot of different folks in my world, and they all do a double
55:56
take.
55:56
They did what?
55:57
And then they got awarded what?
56:00
So it's opening up a lot of the conversations.
56:03
People are saying, OK, there's these things have, you know, various like what the utility, various utility to to what we're talking about here.
56:11
That's been helpful.
56:12
Yeah.
56:14
And I guess second to last question.
56:18
Let's paint the optimistic future for commercial real estate.
56:21
If this is all implemented, let's pretend like people listen to this and they go, oh, my gosh, Chris, you're right.
56:26
Let's begin implementing this immediately.
56:30
That happens.
56:31
what does the world of commercial real estate and not only of commercial real estate, but beyond
56:36
what do communities look like? What does the economy look like if this is fully integrated?
56:43
Yeah, great question. We're going to have to have another hour for that one. But
56:47
you have a much healthier and robust asset class, right? Real estate is the largest asset class in
56:57
the world. It's ripe for disruption. Adopting and integrating Bitcoin into it and some of these
57:04
other strategies makes it resilient. And again, it's going to improve your communities. It's going
57:11
to improve your business. It's going to improve everything that comes with your life and lifestyle.
57:18
I find it, you know, as much as Wall Street gets all the headlines and clicks and whatnot, Bitcoin started as a grassroots movement.
57:29
And it's going, it's obviously continuing that way.
57:33
But with the merchants, you know, the retail merchants adopting it, the investors using these long duration credit products, it's going to be a grassroots movement that continues and saves the real estate world.
57:46
So that to me is how it plays out. That's how it plays out. And I mean, I went through college and entered the workforce when the Great Recession was going down and concluding, right?
58:10
And when the dust settled on all of that, the movies were made, the books were written.
58:15
I mean, it was very clear that there was a lot of people that knew exactly what was going on and they were doing some very questionable things.
58:23
They weren't acting in the best interest of their clients.
58:27
They weren't being good fiduciaries.
58:29
And I don't want to see the same thing happen here in real estate.
58:33
And when the dust settles on this and the movies are made, the books are written for this transition in this potential crisis, I don't want my name or any of my colleagues attached to that, that they were selling buildings in the name of a commission.
58:51
They put a business into a bad lease for a quick fee, right?
58:55
I don't want my name or my firm attached to any of that.
58:58
so if i can go down as you know the the the crazy bitcoin guy that tried to warn everybody
59:04
i can sleep good at night with that um and i'm cool with that so that's i don't know if that was
59:11
if i totally answered your question there but that's kind of how i see it yeah well we need
59:18
more uh more people like you in the world chris because i think uh i think there's certainly some
59:23
some froth in terms of the uh the questionable nature of some some of the actions going on
59:30
in the market right now but you got to be optimistic never doom we have a roadmap for
59:36
how to begin to fix this problem and i think that's maybe another thing to touch on before
59:43
we wrap up i think setting expectations and my impression is that this is not going to be a quick
59:50
fix. This is something that's going to take time to integrate. And you just have to commit to a
59:55
10 year view and start walking. I think that's exactly right. But 10 years minimum. Again,
1:00:02
real estate does not it moves at a glacial pace, right, compared to markets and just everything in
1:00:08
our digital world. So you don't you know, you're not behind, you're not late. This is a perfect
1:00:15
time to get started and start figuring out what the best path forward is, right? I mean,
1:00:23
if you're wherever you are in the industry, right? Brokers, capital markets, property management,
1:00:29
contractors, architects. I mean, it's crazy how many different industries real estate touches and
1:00:39
effects. So wherever you are in that industry, I challenge you to be the first one in your firm or
1:00:49
the first one in your area to start talking about this, get your team, get your partners
1:00:57
talking about it, be the first mover to adopt a Bitcoin standard, get it on your balance sheet,
1:01:05
and and, you know, start harnessing its, you know,
1:01:09
know its power and that goes for every industry for that matter actually insurance pick one yeah
1:01:17
that's what we need to do as bitcoiners we need to spread it out to all these different industries
1:01:21
that power our our economy yeah and again i'll reiterate it it's the solution that will enable
1:01:31
you not to have to point to the fed and the treasury and say don't worry they're going to
1:01:34
fix it. It's like you don't need to wait for them to manipulate interest rates or do a massive bond
1:01:42
issuance, inject stimulus into the economy. You can begin to fix your own balance sheets. And
1:01:48
collectively, if enough people do that, we can look up and say, hey, we actually didn't need
1:01:53
their help. We could do this ourselves, which is incredibly empowering and hopefully exciting for
1:01:58
many people. Because I think a lot of the market, not just real estate, just the American economy,
1:02:04
It's almost held hostage to the whims of the Fed and the Treasury more and more these days.
1:02:12
Yeah. And I mean, as much as much grief as as social media gets and, you know, the various, you know, negative side effects of social media, you know, there's been some some positive things.
1:02:25
And that's flat out getting the, you know, getting the education, getting the knowledge, you know, getting the other side of the story out there and, you know, letting people make their own decisions.
1:02:36
Right. I mean, I I feel like, you know, people talking about macroeconomics these days and now they're dropping the buzzword, you know, debasement trade.
1:02:44
I mean, these are from people that, you know, they've, you know, never before.
1:02:49
Are they you know interested in these topics or you know exploring these particular areas So again I think that the positive side of decentralized communications and media is how many people were able to access
1:03:07
And telling them the other side of why you may not need a Federal Reserve is part of that.
1:03:14
Yeah.
1:03:15
There's a lot of noise out there, but there's also a ton of signal.
1:03:17
You just need to know how to find it.
1:03:19
And hopefully now you found Chris and you can continue to follow him on his journey to implement Bitcoin into the commercial real estate market.
1:03:28
So, Chris, really love this conversation.
1:03:31
We'll have to do it again at some point, maybe at the beginning, first quarter of next year.
1:03:36
And where can anybody who is so curious find out more about what you're up to get access to the content you've been making?
1:03:46
Yeah, thanks for having me.
1:03:47
By the way, this was awesome.
1:03:48
And I look forward to keeping you and your listeners up to speed on the commercial real
1:03:53
estate markets.
1:03:55
You can find me on Twitter.
1:03:57
I do have a Noster account, but I'm still trying to figure it out.
1:04:02
There's a little bit of a learning curve.
1:04:04
I haven't gotten over on that one, but Twitter is the primary.
1:04:09
I post the videos on YouTube as well, but Twitter is the main source.
1:04:13
and once you get to my Twitter you can
1:04:15
find all my other
1:04:17
other channels what have you
1:04:21
we will link to that
1:04:23
in the show notes I hope you have
1:04:25
an incredible Tuesday
1:04:27
on the west coast Chris and
1:04:29
yeah we'll do this again at some point next year
1:04:31
sounds good Marty thanks again
1:04:33
for having me this was awesome
1:04:35
peace and love freaks