Data centers seem like a pretty safe financial bet for commercial real estate investors.
As most major companies in the country, despite what industry they are in, become tech heavy, the need for data storage is only going to increase. Many offices and industrial buildings aren’t suitable for large numbers of servers, which have significant cooling and power needs that data centers provide.
This need has made the data-center especially attractive and valued, as illustrated in Digital Realty Trust’s $7.6-billion acquisition of DuPont Fabros Technology for 12 data centers in the Chicago area, Northern Virginia and the Silicon Valley. That’s quite a price tag for 12 assets, and it boosts Digital’s cloud-data-storage capabilities.
Just after that deal, CommScope announced the formation of the Multi-Tenant Data Center (MTDC) Alliance, which has partners in 88 countries around the globe, and is a resource for the firms that do business in building and maintaining those facilities. The move comes as more service providers are selling off their data centers to third-party operators.
Much of this was foretold in JLL’s outlook for data centers in 2017. The firm said to expect more mergers and acquisitions this year, and specifically mentioned Digital Realty as a candidate that would make purchases. JLL’s report also said that the demand for data centers with sizable cloud solutions in primary markets will continue to increase. Absorption was highest in those areas last year, specifically Northern Virginia, Northern California and Chicagoland, in that order. The continued acquisition of data centers from companies like Verizon by commercial real estate firms is also forecast to be a big trend this year.
As a result, data-center cap rates are compressing, especially in those markets, according to advisory firm North American Data Centers. Another interesting aspect to data centers, as with other hot commercial real estate sectors, is the intention to invest in tertiary markets. Right now, the three mentioned above, in addition to the Dallas metro area, account for 80 percent of the leasing in MTDC facilities, and there is a search for markets with future growth potential.
Some of the big current unknowns are: Will this market reach a peak and when? Will new technology come out that requires less space? How will energy usage regulations impact data centers?
Right now those concerns don’t seem to be top-of-mind for commercial real estate investors as demand grows fueled by the increasing need for data-storage solutions.
As JLL puts it: “The thirst for data will continue even if the broader economy slows.”