In the swiftly digitizing world following the pandemic, the progress in emerging technologies has ignited a greater demand for data center real estate. Whether it’s in support of the expanding infrastructure of artificial intelligence or in response to the explosive growth in eCommerce, streaming, and the integration of communication technologies such as 5G, data centers maintain their central role in facilitating the achievement of growth objectives for various sectors, including entertainment, technology, and even financial institutions.
Investors Are Pivoting From Core Real Estate Markets to Data Centers
Investors are shifting from traditional real estate to data centers due to increased demand in tech and entertainment. Data centers, known for high returns, attract institutional investors now competing with cloud companies. Anticipated data center power consumption surge and 65% of deals involving private equity firms in H1 2022 signal this trend. Major players like Blackstone and KKR are making significant acquisitions, such as QTS Realty ($10B) and CyrusOne ($15B), reflecting the industry’s strategic shift.
Data center real estate firms are benefiting from the favorable trends in an increasingly digitalized world.
The data center real estate market is booming in the increasingly digitized post-pandemic world, paralleling the industrial surge. Projections indicate strong growth rates, with the global colocation market expected to grow by 11.3% annually for the next five years, and hyperscalers projecting an impressive 20% growth. Rent spikes of up to 20% have already been observed in some markets. Arizton Advisory & Intelligence forecasts a substantial $28 billion investment in the real estate data center market by 2028.
The shift to hybrid working has increased the demand for data centers, crucial for storing, managing, and processing dispersed work-related data. These centers also play a key role in the transition from cable TV to streaming services.
Advancements in artificial intelligence, particularly in generative AI, are driving the need for data center real estate due to increased demands for data storage and processing. The growing popularity of 5G networks and heightened smartphone usage is further fueling the demand for data centers, particularly in densely populated urban areas.
Data center real estate firms are facing challenges in meeting the growing demand.
Despite growing demand, the data center market is experiencing some friction when it comes to delivering on high demand. Some of the most common real estate data center tenants include cloud companies like Microsoft and Google, but these players may actually pose a challenge to landlords. Due to their size, capital access and significant data needs, acquiring or building a data center may be more financially viable for cloud companies than renting space.
Challenges in Developing Data Center Real Estate
The data center market, like other real estate sectors, is experiencing construction delays due to supply chain challenges. Despite high demand, preleasing is on the rise. However, increased costs in labor and construction materials are impacting capital expenditures. Some firms face difficulty securing power sources for semiconductors due to material shortages. Predicting power needs and addressing cooling challenges, while meeting ESG requirements, poses additional hurdles. Moreover, the industry is grappling with a shortage of skilled professionals, with 53% of data center providers facing hiring challenges in 2022, up from 38% in 2018.
Real Estate Investors Are Acting Fast on New Infrastructure Opportunities
In response to changing market dynamics and rising capital costs, investors in data center real estate are embracing purpose-built investment software. This specialized software allows them to source, manage, and execute deals with increased speed, transparency, and precision.
By consolidating their pipelines in deal management software, data center deal teams can react more swiftly to opportunities, preventing competitors from gaining an advantage.
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