Data Centers are topping the list for alternatives investors
Investors are increasingly turning to alternatives in the hunt for asset diversification and enhanced risk-adjusted returns. And one sector that is high on the list is data centers.
Long-term secular and structural trends in countries around the world are underpinning growth prospects in the data center market. Key drivers include urbanization, expanding consumer markets and household wealth, and technological developments – not least the adoption of smart phones, the rise and ubiquity of cloud computing, and the internet of things (IoT).
These technology changes mean the amount of data that businesses and individuals are creating and consuming continues to explode. “That data has to reside somewhere,” says Bo Bond, Managing Director, Data Center Solutions with JLL. “So we are witnessing potential hockey stick growth for the global data center sector.”
Healthy state of demand and supply
Market absorption figures indicate this increased demand.
Globally, net absorption increased 2.4 percent, driven by pent-up demand in many key markets – with the EMEA region hitting 135 MW (of which London and Amsterdam accounted for a combined 93 MW) and Asia Pacific totaling 85 MW of absorption.
The United States and Canada boasted 363.5 megawatts (MW) of positive net absorption through 2017, led by the data center hubs in northern Virginia, Chicago, Dallas/Fort Worth and Phoenix. North America’s overall absorption figure was down 8.6 percent on 2016, but that was a record-breaking year sparked by a cloud-leasing frenzy.
Cloud leasing in particular continues to reign supreme in the majority of markets, with many cities reporting upward of 25 percent leasing driven by cloud operators.
“Enterprises across finance, healthcare, retail, consulting and so on are all moving away from self-run data centers,” says Bond. “Cloud adoption allows enterprises to save money and create a lot more value, so that is a trend we will continue to see.”
Alongside strong and sustained global demand, supply is also picking up pace. Many markets reported a larger pipeline of under-construction inventory at the end of 2017. Today, nearly 400 MW is under construction across North America, EMEA and APAC, with North American markets accounting for over 60 percent of the total.
Risks and rewards
Data centers present a compelling investment case. Long-term operating leases ensure a stable income stream, while demand drivers mean the sector is less impacted by the traditional real estate real estate cycle, further improving income stability over the long run.
The business itself benefits from a high degree of stability as well. “Data centers handle users’ mission-critical information, which needs to run 24/7,” notes Bond. “The equipment has to be deployed and tested, so once it is commissioned you can’t just shut it down, quickly move it, and turn it back on. That makes it harder for users to leave once they have deployed.”
Investing in the manufacturers of the equipment that resides in the data centers is another growth area, says Bond. “We are seeing a lot of private equity coming into that market.”
There are, however, some hurdles to investment within the sector. Construction costs are significantly higher than for a traditional warehouse or office building. Plus, there is a steep learning curve. Different markets around the world span a wide spectrum of maturity, so understanding market fundamentals, operational capabilities and local regulations is difficult but essential.
“As an investor, it’s important to understand the depth of the market and what is really driving it, as well as the unique details of each particular company,” says Bond.
What is clear is that the exponential increase in global data volumes, and their growing importance as a business and social tool, point to a robust future for the data center market. The challenge is to know how best to tap into it.