CRE Companies Bullish on Data Centers, But They Might Be Over Optimistic

Big names in logistics are increasing their focus on data centers. The emphasis on artificial intelligence across many industries and the need for major data processing explains the desire. Companies will need an increasing amount of computer power and data centers are in the industrial space.

However, news from the technology front raises questions about how devoted investors will be to keep pouring money into projects that may take a decade or more to pay off.

Panattoni Development, which previously mostly focused on warehouses, told the Wall Street Journal that it was now moving into the data center space. The company said it hired a new partner, Adam Kramer, who was formerly executive vice president of strategy for data center company Switch and chief executive of carbon-emissions management platform nZero.

Panattoni said it plans to develop a gigawatt of data-center computing capacity over the next five years. The company claims 59 offices in the U.S., Canada, and Europe, and the development of 610 million square feet, including 211 million square feet of custom-built projects.

Logistics firm Prologis in its 2024 second-quarter earnings call, said it continued to see strong demand for data centers and is expanding its portfolio. The company is currently in the process of deploying 1.3 gigawatts of power for its data center business, with a focus on securing long-term power purchase agreements. Prologis is also exploring the use of on-site renewable energy generation and battery storage to support its data center operations. It’s looking to expand in key data center markets. In addition to AI, Prologis is also looking to capitalize on the growing demand for cloud and edge computing services.

But there are two problems: money and time. “We are now building ever-larger AI factories to manufacture intelligence. This buildout phase is only in its second year, and I expect it to continue throughout the decade, to become the largest infrastructure investment in history,” Tony Kim, BlackRock head of fundamental equities global technology, said in prepared remarks.

Tech investors are showing concern about companies pouring money into heavy data center expenses that don’t return in the time frames that they have come to expect. In its latest earnings call, Microsoft executives repeatedly invoked a 15-year investment horizon of as yet unknown billions. Microsoft and Google, for similar reasons, recently saw stock their stocks take hits. They are having trouble explaining to investors how they’re going to make money. That means difficulty in explaining what they will deliver to customers and why they will be willing to pay for it. That leaves the CRE payoff hazy.