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?
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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!
Would love this as well
Sent!
Could you send it to me as well? Current student and would love to learn more about this asset class. Thanks!
Sent
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!
Sent
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.
Sent
Could you send it to me as well? very inetested in the DC sector.
Sent
Could you send it my way as well?
Sent
Please send, thanks!
Sent
can you please pm? thank you
Sent
Do you mind passing along, please?
Sent
Would love this as well!
Sent
I would love to get a copy as well. Appreciate it in advance!
Sent
Can you send my way too?
Sent
Could you send to me as well. Thanks so much!
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.
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