Unlocking the Potential of Data Center Real Estate Investment

During a panel discussion at MIPIM, titled 'Unlocking the Potential of Data Center Real Estate Investment,' I was joined by industry stalwarts as we delved into the dynamic world of data center real estate and the myriad opportunities and challenges it presents.

Global Growth and Demand

The recent surge in content generation, cloud migration, and AI commercialization is fueling global demand for data center capacity. The U.S. has witnessed over a fourfold increase in take-up, while Europe has more than doubled its uptake, with record-low vacancies across the board.

Despite this remarkable growth, the European market trails behind the U.S. by five to seven years. European tier-one markets include Frankfurt, London, Amsterdam, Paris and Dublin; however, tier-two and -three markets are poised to outperform as they start from a lower supply base. Ultimately, the most ideal data center locations have access to power and robust connectivity, amongst other key characteristics.

Navigating Challenges and Risks

• Access to Power: The sector faces significant challenges with regard to power supply, as AI/ML data centers require significantly more power density; however, some interesting solutions have arisen. For example, a new reactor at Georgia's Vogtle nuclear power plant is now in commercial operation – the first new nuclear reactor to start up in the U.S. since 2016. Additionally, Amazon Web Services (AWS) recently completed its acquisition of Talen Energy’s nuclear-powered data center campus in Pennsylvania. We are also seeing operators look to hydrogen, wind, and natural gas power sources.
• Financing: In the near term, financing is attainable; however, increasing scale presents long-term challenges. Debt markets in the U.S. may pose obstacles to growth as concentration increases. Overall liquidity is increasing, but it will take time for equity capital to rotate into the sector.
• Regulatory Frameworks: In addition, regulatory frameworks vary across regions, and navigating them can be complex - especially in the UK, where government departments are often siloed.

Community Engagement

The development of data centers faces some resistance from local communities. However, progress is being made to win the hearts of local communities through tax contributions, job creation, and community engagement initiatives – not to mention the service that the centers provide for customers.

Sustainability

Sustainability is at the forefront of the data center sector, with commitments to carbon neutrality and renewable energy sources driving long-term buying decisions. For instance, my fellow panelist VIRTUS' Helen Kinsman highlighted the commitments of the company to be carbon zero by 2030; any electricity it consumes will be green and renewable, with at least 30% of power generated by solar and wind.

Meanwhile, while retrofitting legacy facilities is a consideration, new builds designed to the latest environmental standards are still preferable for future-proofing assets - and will remain so for the foreseeable future.

Predictions for the Future of Data Centers

• Tier-two markets will outperform tier-one.
• There will be a refocusing of deployment efforts from AI training to AI inference in long term, creating the next leg of demand.
• Record levels of leasing are anticipated as capital recycling continues and new pools of capital enter the market.
• Liquid cooling technologies are likely to advance, reducing running costs and broadening the applications of data centers.
• Lastly, and perhaps most importantly, the issue of talent acquisition. Worldwide, the industry grapples with a shortage of skilled professionals; in the coming years, encouraging younger generations into the sector and diversifying talent pools will be critical.

Data centers stand at the forefront of modern infrastructure, offering lucrative investment opportunities amid technological advancements. As we navigate regulatory landscapes, tackle sustainability goals, and source the right kind of talent, one thing remains certain - it's an exciting time to be part of the data center market.