Drive through rural Texas and you’ll find abandoned warehouses and power plants that are a hundred years old. Even with the growing demand of warehouse space for e-commerce companies, older factories and warehouses are harder to retrofit. They’re generally not as attractive to buyers.
But crypto miners, who need warehouses to store essential technology, are buying them all up. Whether its airplane hangars, denim mills, aluminum smelters or clothing factories, crypto entrepreneurs are turning these properties into mining facilities.
Now these mining operations are expanding outside of Texas. Old warehouses in North Carolina, Georgia and Kentucky, as well as the Finger Lakes region of New York, are all hot areas. Crypto firms are looking for an inexpensive power source for the energy-intensive process of crypto mining, so rural locations are key. Most of these former factories are owned by real estate developers who bought them for cheap when companies fled and are now reselling them.
Electricity is cheaper in these zip codes. Just look at the statistics. Property managers are filling warehouses with computers and vents for cooling. Some are even opening their roofs and using them for vents.
According to a report from Statista, crypto mining in the United States has tripled over the past year, and it’s likely to continue growing in the coming year. With the ever-growing presence of cryptocurrency in our daily lives, it makes sense that way more crypto mining facilities are going to be needed in the short-term future.
Image provided by Jay Zapata
Jay Zapata is the Principal at JDZ Holdings in San Diego, California. He spends a portion of his time working with crypto miners searching for industrial real estate. Zapata spoke to Leverage.com on mining, hundred-year-old warehouses and the energy supply for bitcoin mining.
Bitcoin mining is big in Texas because you get more space, so where do you get demand for crypto mining warehouses?
Texas and one in Paraguay. I’ve been doing this on a small scale since 2016. Only recently, since 2019, it has picked up and become more of a bigger thing. Mining economics have changed significantly. There’s been a big push for bitcoin to make it more adopted in the traditional finance realm. Crypto and bitcoin mining is very profitable if you’re looking at bitcoin price and where it’s going in the next five years.
What’s driving this growth?
There’s going to be a mass adoption of bitcoin and a standard globally. If you have access to cheap energy, which is your biggest cost center, that helps a lot. There’s a lot of energy that’s misappropriated or miscommunicated at times. That goes for both fossil fueled-based and renewable energy.
Over the next few months, we’re passionate about pushing a carbon-neutral standard. Before we can become carbon neutral, we have a couple of options when we hit natural gas reserves, if you’re not close to a pipeline. Over the next two to five years, there will be bitcoin miners who have mined on-grid and will realize it’s economical and environmentally-friendly because you’re burning gas as a natural resource that’s going to get combusted anyway and get cheap power out of it too.
As long as the methane doesn’t leak into the atmosphere. Some companies are doing that.
Others are adding solar assets, which has changed a lot since 2019. It’s economical now, especially with the tax credit that’s available.
How are old, defunct warehouses being used for crypto mining?
They are. When you’re looking at a piece of industrial real estate, the first thing you look for is the power. That’s the biggest cost. You hope it’s going to be cost sustainable for yourself.
Then there’s the structural component on the property (a warehouse). You want at least 10,000 square feet. Miners don’t require a ton of space. They stack them on each other in a warehouse to minimize space. But if you can have 10,000 miners, you’re going to need a significant amount of warehouse space. Some people do micro farms, which are less than 10 megawatt facilities.
Why are these warehouses considered “defunct?” Are they a fire hazard? Parking lots too small? Are they falling apart?
You want to make sure the structure — like if it’s a modular warehouse — you want to make sure the fundamentals are there. Bring in a site inspector to make sure the building is actually up to code. If it’s a fire hazard, and you’re running high voltage machines, you want to make sure your electrical setup will not cause a fire. Usually you’re not super concerned how it looks, cosmetically how the building looks. You’re just looking at the functionality and the electrical infrastructure.
In this case, what is “functionality”? Computers can be stacked and there’s a cooler in place so it doesn’t overheat?
You can bring your own box coolers and giant fans that create an airflow direction. It’s more about the capacity of transformers in the building. So you’re not only evaluating the building, but the general vicinity around the property to make sure it meets your operational goals.
How old are these warehouses that people come to you looking for? Are there any that are 100 years old?
It all depends how the building has been constructed. If it’s concrete and solid, and nothing is wrong with it, like fire damage, it can even be as old as 100 years old.
If it’s a modular building that’s steel, you have to make sure it’s structurally sound and that it has been signed off by structural engineers. For that, a building can be 50 plus years old. If you need to construct or rehash the building, that’s an additional expense you have to look at.
What is your approach?
With how my company works, we have to contract a lot of our construction, goals and tasks. We don’t have internal electrical or structural engineers. We contract that out.
I need to make sure it is structurally sound. A site inspection is going to be your bread and butter of scouting a building and making sure there aren’t going to be hazards to your equipment and the electrical setup.
What is the typical square footage of these warehouses for crypto mining, and where exactly in Texas are they the most popular right now?
There’s a tier system in your investment. If you’re going from 1 to 10-megawatt setup, you don’t need a building larger than 10,000 square feet. It will work if you’re stacking vertically, if you have 20-to-30-foot ceilings.
If you’re going to these huge farms, like the one in Rockdale, Texas, which is one of the biggest ones in the country, you’re looking at 50-to-80-foot verticals and stacking your racks vertically, with 50 to 100,000 square feet. Massive buildings. They’re all typically located in east Texas near Austin, anywhere there are energy assets that are underutilized.
Who are your clients?
The profile of our clients is typically two different types: The most common are young startups who recently started mining, who have up to 5 megawatts worth of machines.
I also work with people who don’t have an energy background. Others don’t have the capital to build out their infrastructure and are focusing on putting their capital on buying the machines to do the work. What they need is the electrical infrastructure and warehouses.
That’s a perfect client for us. It gives us the ability to lease them the space and charge them monthly on one-year or five-year deals. That’s where I was five years ago, so I love working with them.
I also work with foreign entities, foreign individuals who are high net worth who have been mining for quite some time and are expanding. China banned crypto mining in June of last year, so that caused a huge mass exodus for miners looking for warehouse spaces.
What do people want from this?
People want a return on investment within a two-year time frame. The individuals we speak to now have heavier pockets. So they’re able to put down six months of pre-paid service, or pay up front a year and sign a five-year deal because they like the energy economics they get with us in the U.S. or at our location in Latin America.
What will happen in the coming year? How will this grow?
What will start happening — and many companies bigger than us have started doing this — a lot of the miners have only focused on allocating their capital on their machines, but now we’re seeing Bitcoin is going to climb. Some treasuries for these companies, they’ve built over the coming years. They’re looking to vertically integrate.
You can’t be a bitcoin miner anymore. They’re going to acquire energy assets.
We’re seeing massive buildouts where companies buy land in Texas or Oklahoma, some are $275-million companies, publicly traded. They’re going to become major players in the energy space. I think we’re going to see partnerships between traditional bitcoin mining organizations and energy organizations, through a merger and acquisitions deal.