Capital Is Pouring Into Data Center Market

Capital isn’t merely eyeing the data center market, it is already pouring in. Along with increased data center leasing activity, as noted last week in a report from CBRE, data center investment demand is also increasing. A variety of capital sources are looking to increase exposure to the market, and more and more players are entering the game.

“There has been an increase in the number of investors looking to add data centers to their portfolios,” Pat Lynch, senior managing director of data center solutions at CBRE, tells GlobeSt.com. “Private equity infrastructure funds have been the biggest driver of investment activity. The funds tend to have a much longer holding period and a lower returns threshold than some of the original private equity investors in the data center space. That is a huge game changer for us.”

It isn’t only private equity funds and private equity infrastructure funds fueling demand. Foreign capital from Europe, Asia and Canada and large real estate investors also have an appetite for data center product. “There have also been international funds that have invested in the data center space,” says Lynch. “Some of the large traditional real estate companies are also making investments and having data centers as part of their holdings.”

The investment demand is adding up. “If you look at the five largest data center REITs in America, they far exceed in market value the industrial, retail or office REITs,” says Lynch. “Had we looked at that a few years, back, we would definitely not have seen that. That is another indication of how investors are looking at the data center space.”

The investment activity is directly linked to data center leasing demand. “The globalization is driving international activity,” adds Lynch. “Many companies need to be global, and a lot of their clients are looking for and expecting developer/provider partners to be global as well. Out clients will often favor a provider that can solution them in multiple markets domestically as well as internationally over someone that can serve them in only one or two markets.”

Looking ahead, Lynch expects investment activity to remain strong in the near term. Beyond that, it is a little unclear. “This industry is still really new. The space that we are providing today is very different than the space that we provided even three years ago, and that space was significantly different that the space that we were providing 10 years ago,” he says. “So, it is still evolving. Short-term, we show very strong demand from all aspects of our client base. After that, it will depend on the emergence of new technologies. That could once again change the market dramatically.”