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Data centers — real estate or infrastructure, or does it matter?
Research - AUGUST 22, 2019

Data centers — real estate or infrastructure, or does it matter?

by Drew Campbell

It is tempting to think of data centers as only another category of real estate — not unlike office, retail or industrial. Each property type offers space, which is measured and leased in square feet or square meters. The development and construction process for the different real estate types also is similar, from land acquisition and permitting to the process of finding tenants.

But then there are the differences.

One of the key characteristics of data centers that sets them apart from their real estate peers is the higher demand for and emphasis on power — both the immediate need to run and cool thousands of servers as well as the backup power on hand that can seamlessly keep those servers running for up to a week or more, should the primary power source go down.

Data center operators determine fees based not only on the square footage each customer uses but also the amount of kilowatt power used or provisioned. Other services include access to broadband, interconnection with other customers, security and onsite professional services.

A second important characteristic of data centers that makes them a hybrid asset type is what’s inside the box — servers, semiconductors, fiber and, of course, data.

This mix of real estate, telecommunications and power has drawn interest from infrastructure investors that are familiar with investments in cell towers, fiber networks, and power generation and distribution. Most of these investors are focused on building internal data center teams that operate all aspects of the business, from acquiring and developing assets to leasing and operating the business.

At the moment, infrastructure investors are finding the data center market attractive because they are experiencing rising valuations in traditional infrastructure sectors such as roads, airports and midstream energy. The high prices are leading them on a search for value in other opportunities, including data centers, and while the number of infrastructure funds in the market is small — four to five by some estimates — as the market grows and matures, more are expected to follow.

The prospects for growth in the data center market seem astronomical as telecom companies and governments begin to build out 5G networks capable of handling more data, and tech companies put more data capturing devices and sensors into products as varied as phones to cars to toasters. The promise of artificial intelligence, meanwhile, is waiting on all that data to be collected and housed, so it can perform its magic through computations and analytics. The world is on the cusp of data revolution that could be compared to the upheaval caused by electricity brought to homes and industry at the beginning of the 20th century — and data centers sit at the nexus of the revolution.

It is not difficult to see why the sector has attracted the interest of real estate, infrastructure and private equity investors. Proponents of data center investing believe the market’s growth potential can create opportunities across the risk-return spectrum for a number of investors types.

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