Data Center Investors Seek New Paths to Capital Deployment

Commercial real estate investors targeting the data center sector are increasingly trying out alternative routes including development partnerships and mergers and acquisitions, according to a JLL post. 

“Capital has been focused on just a select number of deals, and with a scarcity of opportunities, investors are having to get more creative in their deployment of capital,” Luke Jackson, Data Centers Capital Markets director for EMEA at JLL, said in the post.

Metaverse Driving Interest, Need for Power and Data

Last year, global data-center investment reached $47.1 billion, up from $34.5 billion in 2020. These flows will continue this year spurred on by different and new sourcing of capital, Brad A. Molotsky, partner at Duane Morris, tells GlobeSt.com.

Cap rates will continue to compress but are likely to hold around the mid 3s given interest rate pressure going up, he said.

Meanwhile, demand for space should continue to increase given the many participants’ increased need for cloud-based sourcing as well as expansion into the Metaverse in real estate and consumer brands, which is driving a whole new application that will also consume power and data.

Institutional Investment Rising

Jackson said more M&A activity is likely as institutional investment rises.

“Large funds continue to be dominant buyers, buying platforms—which in recent months has been the approach taken by new entrants—while new capital continues to be raised,” he said in the post. For example, Principal Real Estate has so far raised €155 million for its data center fund from asset managers, pension funds and insurance companies in France, Germany, Spain, and Malaysia.

“There’s an increasingly wider range of investors coming into the sector, that can be landlords, or investors in data center enterprises and the operational business,” John Wilson, data centers financing director at global investment bank SMBC, told attendees of a recent JLL webinar.

Molotsky said there are likely to be fewer deals but the deals will be bigger in total scale and size. Indeed, Wilson also pointed out that data center deployments have become larger, resulting in ever increasing amounts of capital investment required.”

This is why joint ventures between investors and operators are likely to happen more, at both one-off project and platform level, Jackson said. “But more development to satisfy investor demand will be key,” he said. “If you can’t buy the product, then you need to build it.”

The Rise of Moratoriums 

One challenge to this development is the rise of moratoriums on data center development around the world, JLL says.

Molotsky reports that his clients have not been overly affected by them; instead they are becoming more of a factor for warehouse distribution centers due to resident pushback against the increased number of  trucks and traffic on local roads.  

Molotsky added there has been a dramatic uptick in the number of players looking to site facilities and operations in Opportunity Zones given the huge upside for no capital gains on sales after 10 years if structured the right way.