Quality Is Crucial to the Longevity of the Data Center Market

Data center activity is increasing in several key West Coast markets. Los Angeles, Phoenix and Orange County all reported an increase in data center activity in the first half of the year with new capital entry into the market. But, what does the data center sector look like long term? The question is a bit of an unknown. In the last five years, the market has changed rapidly with the introduction of new technology and new demand needs from users. In the next five years, the introduction of more innovation, like artificial intelligence and block chain-style computing could again disrupt the data center space.

“Artificial intelligence and block chain computing could be massive requirements for the data center space, and they could change the market dramatically, in the same way that other innovations have changed the market in the last few years,” Pat Lynch, senior managing director of data center solutions at CBRE, tells GlobeSt.com. “New technologies, like artificial intelligence and block chain are going to be attracted to high quality product, and I think those users are going to continue to absorb large blocks of space.”

To keep up with new technologies, investors should focus on quality, new construction and adaptable product. This is an investment sector where product is going to rapidly age. “I am cautious about data facilities that are 10-years are older. In this business, 10 years is quite old and if data centers aren’t able to update, they could become obsolete,” says Lynch. “So, I am bullish on high quality, large-capacity and new space. I think those properties will continue to have demand while older space will have a challenge.”

Infrastructure funds, which have become highly active in the data center space, are developing long-term hold strategies, which could help to protect against rapid technology changes. “The infrastructure funds are looking at a longer hold period, typically seven to 10 years. So, if you think about it, that is about the length of a cycle,” says Lynch. “That does make me take a step back and think again about the quality of the asset. Investors that hold longer term can really weather an economic downturn in any industry, and much better than a short hold, high return investor. For those investors, this business could make them nervous.”