Dave MerinApril 2021
Property development has historically been pursued supply first
For the past few centuries, the standard model of property development has been for a promoter to get control of a plot of land and then work to make it more attractive to others, thereby increasing its value and allowing the promoter to profit. The work of the promoter once they get control of the land usually takes the form of some combination of improving the land with physical / social infrastructure and, crucially, marketing the land to the world.
If a promoter is unable to effectively market the land to potential inhabitants, you end up with a high risk of a white elephant project. If you build it, they will not necessarily come. The risk of this sort of epic squandering of resources on vanity projects no one particularly wants is particularly high in a MMT world.
The great irony of the old real estate aphorism of location, location, location is that it's not necessarily about the land itself.
While the natural beauty of certain spectacular plots of land, like Santa Barbara or Cape Town, can be enough to create incredibly valuable pieces of dirt irrespective of their inhabitants. It's really the mimetic desire of people to be in the same place that drives the truly epic land values (see, e.g., Tokyo).
You can often witness this play out in a single lifetime via gentrification in legacy cities. First the artists and other culturally rich, but monetarily poor, people move into an undesirable and cheap area that's geographically proximate to a mimetic center of gravity, then they gradually make the area more desirable by opening up their own businesses, like vegan latte cafes or local craft shops, thereby attracting the next level of slightly monetarily wealthier and culturally poorer individuals, which will almost definitionally be a larger cohort of individuals. This gradually drives out the “less desirable” initial inhabitants of the area and repeats in a "virtuous" cycle that eventually results in $6M condos in a place that once had some of the cheapest rents in the city.
The maturation of the social and economic internet has made it dramatically easier to pursue demand first property development
Despite the speed at which gentrification can sometimes seem to occur and the speed at which talented leadership can increase the desirability of already desirable places, developing a truly new and durable mimetic center of gravity in the physical world has historically taken generations to play out.
It can take a while for a place to more than temporarily establish itself as the place everyone wants to be principally because everyone else wants to be there.
The growing power of internet communities could fundamentally alter this historic truth. r/WallStreetBets has shown the economic power of socially coordinating online. DAOs will only accelerate this as internet communities will be better able to pool their economic resources.
In a world where a growing number of people are first coming together online then meeting in the real world and where a growing number of people can work remote via the internet, it now seems feasible to take this to the next level and pursue cloud first property development.
Our idea is to proceed cloud first, land last. Rather than starting with the physical territory, we start with the digital community ... we organize our internal economy around remote work, we cultivate in-person levels of civility, we simulate architecture in VR ... Over time we eventually crowdfund territory in the real world. - Balaji Srinivasan
This is an inversion of the classic real estate development process that uses modern technology to seek to first aggregate demand and then find the supply rather than first control the supply and then try to create demand.
In practice, this could look something like an entrepreneur building an online community of likeminded individuals (e.g., homeschool advocates, Pokemon fanatics), then gradually bringing that community together in the real world on a more temporary basis to build deeper social bonds, then helping the community pool resources to buy a plot of land, then putting in the infrastructure to allow people to move to the land more permanently.
Done correctly, this would dramatically amplify the risk adjusted rewards of property development. Not only would the risk go down due to the pre-aggregation of demand, but the cost of land acquisition should decrease as well. Typically, the bulk of the value in property development is created in the land itself (e.g., via getting it properly entitled for development) while construction of the buildings tends to be a relatively low margin activity and in particular existing land owners who haven't pissed off their neighbors are typically best positioned to capture this value due to their pre-existing political ties in the area. Aggregating demand first facilitates a value transfer from existing land owners to cloud property developers in two key ways: (1) it has the power to make previously less desirable land much more desirable by creating a new mimetic Schelling point for a given community and (2) it increases the bargaining power of the cloud property developer, as once they have the demand they can play multiple property owners and jurisdictions off each other to drive the best bargain - something that could prove particularly disruptive, as will be discussed later. Cloud first property development should be wildly more profitable than traditional real estate development.
This can obviously be done at various scales, from a group of friends relocating from a large metropolis to a scenic hamlet, to a large group of philosophically aligned people seeking to build a new city state with their own laws that better accommodate their values.
The combination of crypto enabled global remote work and demand first property development could reshape the civilization, but will take time
It's this increase in bargaining power the online communities could have with terrestrial governments that has the potential to be the most geopolitically disruptive over time.
As these communities get more bargaining power, they'll be able to negotiate with governments, just like Amazon did with HQ2, but potentially on an even larger scale. Of course, on an individual basis telecommuters could easily resist taxation like large corporations do today, but when acting in concert, they can go much further and expand to adjust all manner of laws the community would like, as is the case with Prospera in Honduras. In the fullness of time, it seems likely that whatever set of regulations creates the environment that facilitates the most productive knowledge workers should win out.
Could these communities evolve into city states that fundamentally challenge the Westphallian nation state order? Perhaps, but it's still much too early to tell and even if it doesn't, it still likely represents a fundamental disruption to the property development industry and the opportunity for immense profits in the decades to come.