Data Center Investment Remains Hot, But There Are Caveats

CBRE recently came out with its Global Data Center Investor Sentiment Survey. Demand remained “robust” in the second half of 2021, it reported, including “record-breaking M&A activity” and cap rates compressing.

But anyone looking at investment in data centers should remember a few considerations inherent in the property type.

According to CBRE’s survey, 95% of respondents plan to increase their investment in the data sector this year. About half were interested in opportunistic, value-add, and core-plus.

Core offerings, though, lost some luster as interest dropped from last year’s 50% to 40% in 2022 because of high valuations. Cap rates in “select trades” were in the mid-to-high-threes. Otherwise, cap rates were largely unchanged.

There’s also some inherent misdirection in the numbers. “Record M&A activity, fueled by the acquisition of CoreSite by American Tower and of QTS by Blackstone, accounted for nearly all of the data center investment volume last year,” the analysis noted. “Total data center asset sales remained on par with recent years, ending 2021 just shy of $5 billion.” Also, about half of the North American investment volume was from foreign investors.

The report quoted Kristina Metzger, leader for CBRE data center capital markets, North America: “With far more capital allocated to the sector than investment opportunities, market conditions continue to strongly benefit investors eager to monetize existing assets and operators seeking new capital partners.”

“Despite the prospect of rising interest rates, overall capital allocated to the highly competitive and mature North American data center market remains very robust,” the report said. But is that because more capital continues to come in from outside the region/? Is the profile of investors changing?

There is other evidence of the heat in the data center market. For example, in January American Real Estate Partners and Harrison Street announced a $1 billion joint venture to develop data centers in Northern Virginia. There’s need for data centers and demand is good for those investing in supply.

For those looking at the sector, however, some forbearance is in order. Investors have increasingly looked at ESG in real estate properties and data centers are enormous energy hogs for running servers and networks and for cooling all the generated heat. With the rapid development of technology, a data center built today could be obsolete in five years as hyper scalers like Amazon, Google, or Microsoft want two-to-three-year leases with extensions, which means they walk away when convenient.

Finally, data centers are facing strong pushback from communities and governments that don’t want them in their backyards.