Institutional Investor Interest Driven by Exploding Data Center Demand

Institutional Investor Interest Driven by Exploding Data Center Demand

Commercial News » San Jose Edition | By Michael Gerrity | March 29, 2022 8:59 AM ET

5G, Artificial Intelligence, Streaming and Autonomous Vehicles Key Market Drivers

According to new research from CBRE, strong appetite for data, fueled by continued growth in cloud computing and social media, and the emergence of new technologies such as 5G and autonomous vehicles, is driving increased investor interest in data centers.

Ninety-five percent of survey respondents, which include many of the world's largest institutional real estate investors, plan to increase their capital deployment in the global data center sector in 2022. Capital allocated to the sector continues to expand with more than three-quarters of investors allocating over $100 million of equity to the global data center sector for 2022 and nearly half allocating over $300 million.

Investor interest in the global data centers sector is robust across the risk spectrum, with half of respondents expressing interest in opportunistic/new development, value-add and core-plus offerings in 2022. Two-thirds of respondents are interested in pursuing opportunistic/new development investments this year.

Silicon Valley is the most desirable U.S. data center market, favored by 38% of investors surveyed. The reasons for the market's appeal are its strong economic fundamentals, stability and availability of product, the survey found. Other primary data center markets favored by investors include Northern Virginia (36%), Phoenix (29%), Chicago (28%), Atlanta (27%), Dallas/Ft. Worth (26%), and New York Tri-State (24%). Higher initial returns relative to other markets was cited by investors for interest in emerging markets such as Houston, Minneapolis and Boston.

"Data centers is a high-growth real estate sector with extremely positive fundamentals," said Kristina Metzger, Leader of Data Center Capital Markets for CBRE in North America. "Investors are flocking to data centers because of the stability they provide as mission-critical infrastructure hubs for global business. The emergence of new technologies, such as 5G, Artificial Intelligence and autonomous vehicles, holds promise for further explosive growth in data use and thus, data center demand."

Key U.S. Market Highlights:

  • Investors intend to materially increase their overall percentage of data center assets under management over the next five years. While 49% have less than 5% exposure to data centers today, only 21% of respondents expect to have less than 5% in five years' time.
  • Over the next 12-24 months, 32% of respondents see operating platform/entity investments as the greatest investment opportunity in the sector, ahead of hyperscale build-to-suit investments with 22%.
  • 78% of respondents cited high valuations and intense competition as their greatest challenges to achieving their current investment strategies.
  • 45% of respondents anticipate continued cap rate/yield compression in 2022.
  • 72% of respondents cited Environmental, Social and Governance (ESG) considerations as "highly important" in their overall data center investment strategy.

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