Real estate data center is an essential part of our modern lives, housing the infrastructure that powers everything from shopping online to working from home. And with demand for these buildings on the rise, they’re primed to set growth records this year.
The demand for real estate data centers is driven by two primary factors: the rise of cloud computing and the increasing use of big data to improve businesses. These factors will drive more investment in the sector, including the acquisition of existing properties by a variety of entities, including large investors such as Blackstone and QTS Realty Trust, according to a new report from CBRE.
One of the most critical aspects of managing a data center is finding and securing suitable land. Once a developer has a site that is appropriate for the type of data center being developed, they need to work with local officials to ensure their project will be successful and meet all legal and regulatory requirements. This includes securing entitlements, obtaining permits and working with utilities to ensure they have sufficient capacity to power the facility’s needs.
Once the site is secured, the next step in developing a data center involves constructing the structure and wiring it. The process is complex and requires the expertise of engineers and architects. The construction phase may be delayed by environmental impact studies or by securing necessary regulatory approvals.
Another major challenge is floor-loading issues. Because the power load in a data center can be incredibly high, it’s important that floors are raised. This allows for airflow through the facility, which can help cool the servers more effectively.
Other costs can include a variety of utility services, such as fire suppression and emergency power. Tenants often pay for these services on a net basis, meaning they pay only for the electricity used in their space. Some tenants also pay a percentage of their overall occupancy expenses.
The highest rents are being paid by data centers with strong network connectivity and purpose-built efficiencies, CBRE reports. “Long-term demand for these types of facilities will remain strong, and rental rates will continue to see price premiums over older, less connected assets,” the report states.
Some of these data centers have the ability to expand in response to customer requests, which helps increase their revenue and adjusted earnings before interest, taxes, depreciation and amortization. CyrusOne (NYSE:CONE), for example, uses a technology called Massively Modular to build new data halls quickly so it can better respond to a client’s needs.
The transaction market for data centers has evolved in recent years, fueled by the growth of data center REITs and corporate merger and acquisition activity. As a result, the largest transactions in the industry have typically been those involving these REITs, but there has been some activity from traditional private real estate managers as well.