Pandemic prompted major investors to dip their toes into data centers. Now they’re diving in





The pandemic has sparked a deluge of capital into data centers, and industry insiders say it won’t stop anytime soon.

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The coronavirus helped catapult data centers from a niche alternative asset class to a growing focus for the world’s largest real estate investors.

While working from home, exploding e-commerce, Zoom happy hours and other pandemic-driven accelerators of digital transformation increased demand for data centers and emphasized the importance and resilience of digital infrastructure, data centers also turned into a kind of safe haven for large institutional investors. to deploy capital as previously reliable asset classes such as hotel and office faltered and suddenly faced an uncertain future. The result is a massive surge in investment and a growing number of investors entering the space.

As hotels, offices and other pandemic-ravaged sectors begin to recover, industry insiders and a recently released survey indicate that real estate investors aren’t just sticking to data centers — they’re doubling down.

“The investment appetite is stronger than ever in 2022 – we see it every day,” said Ali Greenwood, executive director of Cushman & Wakefield’s data center consulting. “We’re getting more calls than we’ve ever received in 2021 and now through 2022 from sovereign wealth funds, larger investment groups, and other prominent funds that are putting together specific funds dedicated to mission-critical space or data center space.”

“We’ve never had such a large group of investors looking to put in capital, and I just don’t see that stopping,” Greenwood added.

In a January CBRE survey of major real estate investors with data center holding companies, 95% of respondents said they plan to increase their capital commitment to the sector by 2022. None of the 115 respondents planned to reduce their data center investment. While half of those surveyed had less than 5% of their total assets in data centers, 4 out of 5 wanted to increase their exposure above 5%.

Experts say the increase in investment volume due to the pandemic has been dramatic, particularly in 2020 and the first half of 2021. Data center REITs have skyrocketed in public markets and real estate investors who have typically been reluctant to engage in the highly technical and specialized data center market tried to penetrate.

Kristina Metzger, executive vice president of CBRE’s data center capital markets group, said the brokerage saw an unprecedented wave of new investors considering data center deals.

“On the average offer we bring to market, we saw an 80% increase in [nondisclosure agreements] performed in the first half of 2021,” said Metzger. “There was a huge pressure to be more educated in this space, and the markets opened up a little bit.”

The massive investor demand for data centers, even among blood-blooded institutional investors, was perhaps most evident in record-breaking M&A activity in 2021 and continuing into 2022. Datacenter REITs QTS, CoreSite, and CyrusOne were all taken privately — by Blackstone, respectively. American Tower and KKR – in blockbuster deals that have all exceeded $10 billion.

If the pandemic has sparked more widespread interest in data centers among real estate investors, will that capital migrate back into more traditional asset classes as core hotel and office holding markets move toward recovery? According to Jonathan Atkin, the global head of communications infrastructure investment research at RBC Capital Markets, this has played out in the public data center REIT markets and could be an indicator of what’s to come in real estate capital markets.

“What the tape seems to be telling us is that data centers saw less investor interest than other asset classes, as business returned to normal with less work from home and hospitality and other parts of the economy that were struggling to pick up,” Atkin said. . “So recovery has kind of diverted investor interest from data centers based on that idea.”

But most of the experts who spoke to Bisnow say that far from leaving the data center space, almost all entrants are looking to buy further.

“Investors believe that their own portfolio will have a greater percentage of data center assets going forward, which is what they want to achieve,” said CBRE’s Metzger. “It will take a long time to get to office or industrial or even retail scale, if ever, simply based on the size of the market. We’re just not there yet. There isn’t enough transaction volume to have a meaningful impact or dent relative to the size of those larger investment markets.”

The overall data center market is minuscule compared to primary asset classes. Total data center real estate sales were just $5 billion during a very robust 2021. Compared to retail developments, or offices or even hotels, there just aren’t that many data centers.

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Meta’s Proposed Data Center in Kuna, Idaho

While demand for data center space is at record levels, the existing inventory and development pipeline cannot keep up with investor interest. There is far more capital that wants to be in data centers than there are opportunities to deploy it, experts say. With supply chain and labor constraints hampering the data center development pipeline, industry insiders say that won’t change anytime soon.

This difference in scale explains why experts are confident that investor capital will remain focused on data centers as other industries recover. If major investors transfer even a fraction of a percent of their total portfolio to data centers, that means a huge influx of capital.

Industry insiders say they are witnessing the maturing of the market as major players who may have entered the market as little as two years ago become increasingly sophisticated and show a willingness to enter into more complicated or riskier deals or develop into new ones. geographic markets.

Metzger says she sees investors in passive market segments — such as so-called powered shell data centers where the investor has a relatively straightforward relationship with a single tenant — who are now looking for deals that require them to be more involved in tenant management or operational aspects of the business. the data center. With more suitors than opportunities, she says, these more complicated investments are the only way many investors can find deals.

“Investors have become much more comfortable with those asset class segments and those kinds of operating models. They had to feel comfortable there,” Metzger said. “This should open up liquidity.”

Likewise, the out-performing investor pool encourages investment across the entire risk spectrum, with a willingness to invest in core-plus, value-add or new development, even in new markets. Its core product — which generally has a long-term lease with a single, investment-grade, investment-grade tenant such as Amazon Web Services — has become the near-exclusive domain of investors with massive liquidity, such as sovereign wealth funds. Experts say the fact that other off-core investors are clamoring for other opportunities is a reflection of a market moving into the mainstream as quickly as a new product can be built.

“The investor class is getting even bigger. Five years ago, when new investors came into the space, they would only want a single tenant, triple net, 100% leased, 15-year asset, while now you see data center investors moving into the space more broadly and also focused on value-add, core-plus and development,” said Greenwood of Cushman & Wakefield.

“Not only is the investor pool deeper than ever, but the appetite is stronger than ever, and we’re seeing a broadening of the way capital is being deployed.”




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