Real Estate Investing

Data Centers Emerge as a Top-Tier Commercial Real Estate Investment

It often seems as if everywhere we look in the commercial real estate sector, the coronavirus pandemic has either plunged the market or introduced a type of lingering uncertainty that would rightfully scare off some investors.

But as with anything else in life, necessity tends to drive up the value of whatever is dictated by a crisis.

Some of the best assets out there right now — in demand around the world — are the data centers that are enabling the dramatic social shifts we’ve seen toward reliance on remote technological solutions for work in the age of COVID-19. Not to mention all of the TV families have been binging in the absence of typical events to attend.

Writing for D Magazine, Cushman & Wakefield’s Bo Bond calls data centers the “darling child” of commercial real estate:

While most commercial REIT stocks suffered significant losses in 2020, the data center subsector flourished, outpacing the lowest-performing REITs (retail) by nearly 50 percent and outperforming all other REIT subsectors with an annual stock performance of +19 percent overall.

Data center spending reached record levels in 2020, led by the ‘big three’ cloud giants: AWS (Amazon), Microsoft Azure, and Google. The market for cloud computing grew significantly, posting revenues of over $90 billion, or a year-over-year increase of almost 40 percent.

The importance of data centers had already been growing prior to the pandemic, but in many ways, the pressures put on other areas of commerce only intensified their advance.

In Chief Investment Officer magazine, experts discussed the impact data centers have had on their portfolios and why they should remain highly valued assets — even if they don’t proliferate at the same rate they have been:

(Block quote) Right now, data centers are all the rage as the US and the world become increasingly digital. “If not for data centers, our core real estate portfolio would’ve been negative in 2020,” said Monte Tarbox, executive director of investments for the National Electrical Benefit Fund. By the same token, he acknowledged that, as ever, there was a danger of overbuilding.

In the future, it may be possible to run more data through existing fiber-optic cables and other delivery pipes, he said. “Just because demand for internet service is increasing,” he maintained, “don’t assume that the supply of internet facilities will need to increase linearly.”

Don’t expect that slowdown to occur in the near term future, however. Microsoft announced this week that it plans to build 50 to 100 data centers per year for the “foreseeable future.”

Unsurprisingly, this trend is also driving a surge in prices for vacant land in areas where investors anticipate there will be interest in constructing new data centers. In Northern Virginia, the world’s largest data center market, Loudon and Prince William counties have seen growth in price per acre of vacant land, based on the belief that it will be a prime target for computing facilities.

The unfolding impact of the pandemic in the commercial real estate sector has magnified and expedited many processes that were already taking shape. While it’s become cliché to talk about a “new normal,” it’s increasingly clear that the fate of the “old normal” and its traditional assets will be redefined as much by what is thriving now as what remains in jeopardy.

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