Cloud Computing Leads to Growth in Data Center Real Estate

Brick-and-mortar real estate has cratered during the COVID-19 pandemic. The single exception is real estate linked to the significant growth in cloud computing: the buildings that house the servers that enable it. Goldman Sachs is investing up to $500 million in data center infrastructure. Private equity companies Blackstone and KKR also plan to invest in data centers, while, according to JLL, real estate investment trusts (REITs) focused on data centers had returns of 19 percent in the first half of 2020.

The New York Times reports that the advent of 5G and artificial intelligence will create even more demand for such data centers. At investment advisory firm Pacer Financial, president of the exchange traded funds division Sean O’Hara noted, “our houses are connected, our cars are connected, our streetlights and parking meters are connected, and every single one of those connections is passing data back and forth.”

Cyxtera, which owns 62 data centers across the U.S. and in Europe and Asia is “on the hunt for new markets.” Company chief executive Nelson Fonseca stated his business “has continued to grow through the pandemic.” “We’re seeing demand across the board,” he said. “Our pipeline going into 2021 is even larger.”

CBRE managing director of the data center solutions group Patrick Lynch noted that, “things like working from home and online shopping and distributed work forces all just layered into the momentum the industry had.” At data center firm Equinix, president for the Americas region Jon Lin pointed out, “we’re the foundation, in a lot of ways, for that digital infrastructure.”

CFRA Research equity analyst Keith Snyder reported that, “a lot of companies had been moving into cloud-based services before, but the lockdown forced them to move to cloud-based a lot faster.” NYT adds that, “demand for space in data centers is also being fueled by the growing number of businesses that use cloud services to manage their operations without having to buy, maintain and update hardware and software … [with] many providers of these services want[ing] to have electronic outposts near their clients’ servers.”

Syracuse University associate professor Milena Petrova pointed out that the increased use of data analytics powered by AI also “requires more computing power, which also takes up physical space.” “The more data a company is going to analyze, the more it is going to need to invest in servers and storage space,” she said. Whereas large companies might be able to afford to buy data centers, others “lease space in a data center that houses multiple companies under one roof.”

Most data centers are being built “on the outskirts of major metro areas including Atlanta, Chicago, Dallas-Fort Worth, New York and Phoenix.” The most important location necessity is “proximity to the clusters of undersea cables that send and receive data from all over the world.” Equinix’s Lin reported that, “the Ashburn area outside D.C. is the largest data center market in the world.” The cost of land and local taxes as well as reliable power delivery are other considerations. States compete since “completed data centers do not require large labor forces, but the jobs are generally high paying.”