Interest Rates and Bitcoin's Impact on Commercial Real Estate

At a high-level, interest rates are determined by combining a base rate with a risk premium. The base rate has traditionally been benchmarked to the Federal Reserve. As the Federal Reserve's FOMC votes to make changes to interest rates, loan interest rates and valuations around the world are immediately repriced.

Given commercial real estate is typically financed by 60-80% debt, changes in interest rates have a significant impact on interest expenses and a property's net operating income (NOI). Beyond effects on NOI, the cap rate, the equivalent of a price to earnings ratio for real estate properties, also compresses as rates rise.

This leads the CRE market to be an inherently cyclical industry. However, this does not have to be the case.

Bitcoin's Integration into Lending

As Bitcoin becomes more and more integrated into lending, a new interest rate paradigm will emerge. The first use case will be collateralizing loans with Bitcoin. As Bitcoin valuations rise, collateralization ratios improve. The loss in the event of a default reduces, resulting in lower risk for the lender. This reduces the cost of capital (interest rates) demanded from borrowers. As Bitcoin grows in adoption, loans collateralized with Bitcoin will be freed from the cyclical nature of the macroeconomic cycles. Ultimately, rates will only go down.

Downstream Effects

This will have the following downstream effects:

• Higher net operating income
• Higher valuations
• Higher equity returns
• More ground-up development
• More deal activity

The Future of Commercial Real Estate Lending

As early adopters prove that this lending model is superior, bitcoin-based lending for commercial real estate will become the standard. This will result in a deviation from the federal reserve as the benchmark rate for calculating interest. Rather, the benchmark rate will now be determined by the supply and demand for BTC-based loans. We see examples of this in how DeFi lending protocols like Aave determine interest rates based on the supply and demand of liquidity pools.

Principal Reduction Through Bitcoin

Beyond just lowering interest rates, one may ask if it is possible to use Bitcoin to reduce the principal amount over the life of the loan. We plan to introduce a plan for borrowers to allocate a percentage of their savings from lower interest rates towards purchases of BTC. These monthly purchases could be held in escrow and used opportunistically towards paying down the principal amount throughout the life of the loan.

Conclusion

In the long-run, we see bitcoin-based financing as the future of CRE. We want Liquid Finance to serve as the DeFi infrastructure to rebuild America.