The Dangers of Data Center Investment

With the growth of 5G mobile data services and the ongoing expansion of digital technology into every aspect of home and work, data centers have become a hot type of investment property. CBRE says that in the first half of 2022, demand for capacity tripled year over year. Industrial owners and investors have been looking to get into the sector with their landholdings, which can seem a match in many ways.

“I do recall a time five years ago maybe where I heard the theory that data center use would decline because the equipment would get more efficient, therefore smaller, need less energy, need less space, but the opposite is happening,” George Kroculick, partner and co-chair of the real estate practice group at Duane Morris, tells GlobeSt.com. “The demand has increased more than anyone could have thought even just a few years ago.”

But even though there is a lot of activity and many existing data centers in the US, the category is singular in some ways. The right ones may well be good investments, but investors have some considerations before jumping into what might prove an unexpectedly cold lake.

Their demands are stiff when it comes to power and cooling requirements. According to the U.S. Office of Energy Efficiency and Renewable Energy, data centers use “10 to 50 times the amount of energy per floor space of a typical commercial office building.” Efficiency has increased over time, but so has growing needs, balancing the improvements. Data centers, each potentially with thousands of computers, networks, and enormous data storage, collectively are responsible for 2% of the total electric use in the country. They also generate massive amounts of heat that must be dissipated, often by water cooling. In the West, with acute water shortages, that has become a contentious issue as the largest facilities can use millions of gallons of water a day, according to ABC News.

Because of regular technical advancements, there’s a normal data center refresh rate of equipment upgrades every five to 10 years, as Computerworld has reported. For the largest data center users, that can be even more frequent, which requires investment and time.

As CBRE notes, there are a handful of geographic hot spots for data centers: Austin/San Antonio, Houston, Southern California, Seattle, Denver, Charlotte/Raleigh, Minneapolis, Hillsboro, and central Washington. Which is fine, but if your expectations are for broader based investing, then Kroculick points out a frequent difficulty. “You have permitted uses, prohibited uses,” he says. “Nobody even defines a data center in most codes across the US. How do you get a data center even approved? If I can’t get it as a permitted use [in a specific area], where can I get it permitted?”

Again, there is good business to be had, but many tripping points to consider.