By Kevin Moore and John Skalla
April 13, 2021
Data centers are garnering significant attention within the commercial real estate sphere – and for good reason. The COVID-19 pandemic has caused our personal and professional lives to be more reliant on the internet than ever before, and data centers house the infrastructure that powers and protects the movement of information. For companies, they are essential to effective business operations, and for CRE investors, they are becoming an increasingly attractive product type.
Defining the Data Center Marketplace
Data centers are essential in today's digitally driven world, as most organizations rely on big data to enhance the efficiency, productivity, security, and cost-effectiveness of their operations. For companies, it has become increasingly complex, time-consuming and expensive for organizations to manage data in-house or on-premises, as large masses of data must be captured, routed, stored, evaluated, and retrieved. A better solution for this data is a secure, stable home.
These homes are data centers, which serve as the physical space to store and retrieve information shared by seven billion internet-connected devices in use today – a number that's continually rising. Users see the inherent value in a data center solution, and investors see strong demand for their product. In the U.S., historically popular data center markets such as Northern Virginia, Silicon Valley, Dallas, Chicago, Los Angeles and Seattle now compete alongside other emerging leaders such as Atlanta, Denver and Phoenix, to name a few.
In a 2021 report, analytics company GlobalData forecasts that global data center revenue will grow at a compound annual growth rate of 6.7%, reaching nearly $1 trillion by 2030. That's more than double the $466 billion generated by data centers in 2020, which points to significant opportunity in this sector over the next decade. Already, there has been a notable increase in the number of traditional real estate funds beginning to invest in data centers, infrastructure, and other technology-driven assets to diversify their portfolios.
A Unique Product Type Designed for a Variety of Users
Not all data centers are the same. The difference between one facility and another is heavily dependent on the type of data stored and its use, and many data centers are very CapEx intensive. For instance, if the tenant is a financial institution, the data center is referred to as "mission-critical" because it must be up and running 24/7. It also requires extensive redundancy, or backup resources in case of system failures. A mission-critical data center has many fiber lines and connectivity points to ensure there is never a hiccup in data relay, payment processing, information storage, and other vital factors.
In comparison, if the tenant is a cryptocurrency miner, the facility likely won't have the same redundancy requirements. A basic data center with power and connectivity offers all that's required for quick and robust cryptocurrency mining.
Whether a data center newcomer or a seasoned provider, we find occupiers and investors often need assistance and resources to navigate on-premises servers or cloud contracts, buildouts, additional infrastructure, expansions, refinancing, and other capital needs. As with other commercial real estate assets, a sale-leaseback, sale, or acquisition benefits from deep knowledge of the market and product type. We expect that with technology’s rapid evolution and exploding adoption, this specialized insight will drive the data center market of the future, creating advantages for both owners and users taking a proactive approach to their real estate.
Kevin Moore and John Skalla are based in Transwestern’s Chicago office. Their team recently brokered the acquisition of a $150M+, state-of-the-art data center in El Segundo, California.