The Digital Era Drives a Brick-and-Mortar Boom in Data Centers

 

The shift to digital work and play from home, hastened by the pandemic, has wreaked havoc on commercial real estate. But experts say it has also generated one surprising bright spot for the industry: data centers.

The growing reliance on cloud-based technology – and the huge, blocky buildings that house its hardware – has created greater opportunities for developers and investors as businesses and consumers gobble up more data in a world that has become increasingly connected.

“Our houses are connected, our cars are connected, our streetlights and parking meters are connected, and every single one of those connections is passing data back and forth,” said Sean O’Hara, president of the exchange-traded funds’ division at Pacer Financial, an investment advisory firm in Malvern, PA.

Companies that provide data storage are preparing for even greater demand as new technologies like 5G, and artificial intelligence become more widely used.

“Our business has continued to grow through the pandemic,” said Nelson Fonseca, chief executive of Cyxtera. This company owns 62 data centers across the United States and five markets in Europe and Asia. “It actually accelerated all the drivers that were growing the industry in the first place.”

Mr. Fonseca said Cyxtera, which typically leases space in its centers for three-year contracts, was on the hunt for new markets. “We’re seeing demand across the board,” he said. “Our pipeline going into 2021 is even larger.”

The acceleration of existing consumer behaviors and workforce trends has driven companies to demand more space for their data, said Patrick Lynch, senior managing director of the data center solutions group at the real estate services and investment firm CBRE.

“Things like working from home and online shopping and distributed workforces all just layered into the momentum the industry had,” he said.

And investors have taken note. “Over the past 90 days, we’re seeing a massive shift in capital toward this industry by big investment funds,” said Andy Cvengros, senior vice president and a member of the technology solutions practice at JLL, a real estate services, and investing company.

In October, Goldman Sachs announced an investment of up to $500 million in data center infrastructure, and the private equity firms Blackstone and KKR have recently announced data center investments.

Real estate investment trusts focused on data centers delivered returns of 19% in the first half of 2020 – one of only two real estate investment trust (REIT) sectors that showed growth, according to a recent report by JLL. (The other sector, industrials, yielded a modest 2% return.) By comparison, returns for hotel and resort REITs plunged 49%, those for retail fell 37%, and office space dropped 25%.

“It’s an acknowledgment that this is not a niche real estate market anymore,” Mr. Lynch said.

Data centers have emerged as a critical part of the digital infrastructure that connects people and businesses to one another and the rest of the world, said Jon Lin, president for the Americas region at Equinix, one of the largest global data center companies.

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