Data Center Overview?
Given the tailwinds of a growing niche sector, can anyone give an overview of data centers? Some questions I have:
- How do you value these assets?
- What is some terminology in data centers that are different than traditional real estate?
- What are the uses of these?
- What do leases look like? Any different terminology on these?
Anyone have a primer on these?
Ah, data centers, the digital age's treasure troves! Let's swing through the jungle of information and get you some shiny nuggets of knowledge:
Valuing Data Center Assets: Just like bananas aren't just sold by the bunch, data centers aren't valued by traditional real estate metrics alone. They're often valued based on their IT capacity, power usage effectiveness (PUE), and the reliability of their infrastructure. Investors might look at the net operating income (NOI) and cap rates specific to data centers, but also consider the technical aspects that drive operational efficiency and reliability.
Data Center Terminology: Welcome to the tech jungle! Here, terms like "redundancy" and "fault tolerance" are king. You'll hear about "Tier ratings" which measure the reliability of the data center's infrastructure. "Critical load" and "white space" are also terms unique to this sector, referring to the power dedicated to IT equipment and the area available for IT equipment, respectively.
Uses of Data Centers: These digital fortresses house servers and other hardware that power our online lives. They're the backbone of cloud computing, data storage, and internet connectivity. Companies use them for disaster recovery, hosting websites, and supporting online transactions, among other things.
Data Center Leases: Leasing a data center is like renting a very specialized apartment for your IT gear. The leases can be complex, often involving terms like "cross-connects" (physical connections between tenants), "interconnection" (network connectivity), and pricing based on power capacity (kW) rather than just square footage. The lease structure might include a ramp schedule, detailing when and how additional power capacity will be provided over time.
For a primer, you might want to check out the threads on Wall Street Oasis where industry professionals discuss their experiences. There's a wealth of knowledge to be found in the forums, and you might even stumble upon a Q&A with someone who works for a data center operator and developer. Dive into those discussions, and you'll come out with a head full of data center know-how!
Remember, the data center sector is as complex as it is fascinating, so keep peeling back the layers, and you'll find the insights you're looking for.
Sources: Anybody here have any experience brokering data centers?, Q&A: I work for a data center operator and developer (Specialty REIT), Q&A: I work for a data center operator and developer (Specialty REIT), Energy Sector Primer
Value them the same as any other asset - NPV of cash flow and reversion. Just like other assets - you need to understand the nuance of the business. Ie.: for industrial you should understand electric supply to your tenant and dock doors PSF. Data centers will have nuance too. Big risk in these assets is what happens at the end of the lease term. The build out is so expensive and specific that if the tenant leaves, you might need to ‘buy the building back’ in TI and base building work.
If anyone finds a good primer please forward. I said I was going to write a white paper for my firm a couple months ago but its pretty complicated so I keep punting in the hopes someone else will.
Very capital intensive/high barriers to entry
Leases are structured in terms of electricity
There's some good info buried here: https://www.spglobal.com/_assets/documents/ratings/research/12102230.pdf
CMBS offering from Blackstone's acquisition of QTS
I don't have access to Greenstreet but I bet they'd have a primer if you have access
FYI NAIOP's most recent magazine issue has some data center stuff in it: Data Center Real Estate: Challenges and Opportunities in the Digital Age | NAIOP | Commercial Real Estate Development Association
I put together a data center primer at a past employer a few years ago, PM me if you want it - still has the branding so don't want to post it publicly.
EDIT: I have now sent this to 60+ people and the requests are overwhelming, so unfortunately I will no longer be sending this around. Everyone who has asked for it below as of 3/13/24 has been sent a copy.
Could you send it my way?
Sent!
Hey, curious if you could send it my way
Would love this as well
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Could you send it to me as well? Current student and would love to learn more about this asset class. Thanks!
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Would you be able to send it my way too? Thanks!
Would you be able to send? Thank you!!
Would you able to send it please?
I'd love a copy as well!
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Could you please share it with me as well? Thanks!
PM'd
Would you able to send it please?
Done
Would you mind sending it my way? Work in industrial brokerage and want to understand the space better
Could you send it my way as well?
Would you mind sending it as well? Looking into developing a large site into a data center facility.
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Could you send it to me as well? very inetested in the DC sector.
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Could you send it my way as well?
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Please send, thanks!
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can you please pm? thank you
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Do you mind passing along, please?
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Would love this as well!
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I would love to get a copy as well. Appreciate it in advance!
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Could you send to me as well. Thanks so much!
any chance I could get a copy of this? Would be really greatful!
Grateful for a copy!
Hi Peremium,
Can I get a copy as well?
Thanks in advance
Do you mind passing along, please?
Hi there, could you still share the document?
Thanks!
Could you please send me?
thanks
Hi @Peremium, would love a copy please!! Thank you!
Cap rates are similar to industrial (5-10% depending on tenet quality; think AWS vs some small startup); the tenet base is typically much higher quality than other asset classes.
Watts are used in brokerage and market reports.
Would really appreciate a copy as well! Thank you!!
Why sticks and bricks investors are interested in data centers is beyond me. It’s like life science for warehouses, which I guess sounds hot until you dig into the fundamentals and realize that you’re buying highly specialized real estate at a massive per pound basis, so if you miss you’re absolutely F’d as there’s no alternative use to bail you out. And then on the demand side Moore’s law implies that the demand for space will get cut in half every two years (or at least gradually decline). Everyone is so excited about AI and tech, but history will tell you that people tend to be overly optimistic on those topics. KKR and BX have data centers listed as “high conviction themes,” but they’re also buying cloud computing businesses on the corporate buyout side, so I understand the interest there, but not from a sticks and bricks real estate standpoint. Any time I see massive per pound basis and the crowd saying it’s the next hot thing, it turns me off immediately. I’ll take a closer look when all of the developers go broke and everyone starts hating the sector.
If you buy (or build) a "powered shell" (i.e. only the bricks and sticks, and not the additional racks and servers), and ensure the shell is reusable for a standard industrial tenant, the risks you reference are greatly mitigated.
Out of curiosity, what sectors / strategies are you finding interesting right now?
I think equity is generally challenging right now considering how cap rates are still low relative to the cost of debt (practically everything is negatively levered) and we’re due for a correction seeing as we haven’t had a real recession for ~15 years. There’s a camp that believes in the 18 year cycle which would tell you that a huge asset driven recession is around the corner, but I think the world is more complicated than that - although it’s an interesting pattern that has repeated for at least a couple of centuries. I think credit is way more interesting right now—not a fresh take, but I think it’s way better to play the current market defensively and if I can make low to mid teens at 65-75 cents on the dollar on good real estate, then I like that a lot more than trying to hit high teens to 20s with massive capital spend, little to no cash flow, and the need to believe in big appreciation or to have to take a view on cap rates at all. I’m a value investor at heart so I like the things that are often cheap and hated or overlooked. I think office and retail are interesting. I love the opportunity in senior housing. Manufactured housing is overvalued and crowded, but the supply/demand fundamentals are still exceptionally good there. I think aggregation plays in fragmented businesses are usually interesting. If you can wrap your head around the affordable housing business (LIHTC/section 8), there may be value there. There’s always a lot of opportunity, but chasing what’s in vogue never appeals to me. I want hairy, complicated, ugly, preferably distressed. Commodity malls are an exception though. I probably wouldn’t touch those unless the math penciled as a land value scrape. All that said, I’d rather not focus on top down strategies and think it’s best to look at each deal in a vacuum and let the numbers speak for themselves. There’s a price I would pay for everything, even the B/C mall. You just need to find someone desperate enough to take your bid.
Not really, if your DC tenant moves out the amortization of the infrastructure will make your offering uncompetitive with the rest of the industrial market given how much additional capacity psf is needed in a DC vs a traditional industrial tenant. For those of you who are unaware it is at least 10x more psf than a traditional powered shell.
I’m an associate at a large data center developer/operator. I could go on and on but the challenge everyone is facing right now is power-ready sites. Power load demands are significantly higher than projected power availability on the grid, largely due to the data centers, crypto miners, and the recent resurgence of domestic manufacturing. If you are not already in the queue(PPA Signed with timeline from utilities company), you are fucked with extremely delayed power supply and substation buildout equipment(almost all data centers will require a new substation build out). Lead times for sub supply chain is 3-5 years and major service providers have quoted 5-7 years for any significant power to be provided to any given site, unless it has existing power or is in the queue. Let me know if you have any questions and I will do my best to answer.
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