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August 20, 2017

Get In on the Data Center Boom

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Get In on the Data Center Boom

As the use of mobile devices and cloud computing intensifies, more companies are demanding well-managed spaces to house servers and other information technology hardware.
server room

The booming data center property market creates opportunity for real estate professionals who can learn the field, mastering information technology and engineering issues. But this wasn’t always the case, according to Pat Lynch, managing director for CBRE’s data center solutions division in Denver.

“Five years ago, it was difficult to get a commission for tenant representation” in the data center space, Lynch says. “Now certain data center REITs aren’t just paying us commissions but are sponsors of our events and attending our conferences. There’s an embrace of well-run brokerages.”

The strength of the sector is illustrated by the returns on REITs. The FTSE NAREIT data center index returned a whopping 33.17 percent in the first seven months of the year, trailing only the industrial sector, where REITs returned 33.18 percent.

“Banking, trade, insurance, retail sales, social media—all that information [which goes through computers and mobile devices] is processed and resides on servers, including data stored on the cloud,” says Bo Bond, managing director of JLL’s data center solution business in Dallas. The facilities storing those servers “are a very important part of real estate,” he says.

Companies with major offerings in cloud computing—such as Google, Microsoft, Amazon, and Oracle—need their own buildings to house these servers. Companies with less of a need can rent space in colocation facilities. Even the smallest of businesses need data center space for securely storing customer information, hosting websites, and managing transactions.

“Everything is being done online,” Lynch says. “For companies big or small, cyber security is important. Financial services are a large component of our pipeline, so is healthcare.”

These companies have specific needs for data center space. The massive power needs of the machines housed in data centers requires robust, reliable air conditioning systems to keep the machines from overheating. This means buildings also have to be secure and have a tight envelope. However, that hasn’t stopped some developers from adapting old industrial buildings from the 1920s and 1930s and turning them into data centers, including the Lakeside Technology Center in the near south side neighborhood of Chicago, a former printing plant that was converted into a 1.1 million square foot space serving the city’s commodity markets.

The biggest markets supplying data center space include New York, New Jersey, Dallas, Silicon Valley, and Chicago. But the biggest market for this niche is immediately west and south of Washington, D.C., due to both historical and monetary reasons. “Northern Virginia is the epicenter of the internet, which grew from there,” says Tim Huffman, director of Colliers’ technology solutions group in Atlanta. “The cost of power is 40 percent less than the national average and tax incentives are robust.” Energy costs are a major issue due to the cost of running the servers and the climate control issues faced by these large warehouse spaces. Lynch adds that Northern Virginia has earned its spot at the top of the data market due to the types of companies it serves: “The government creates demand, there are a lot of technology companies in the area, and it has proximity to Europe.”

Meanwhile, financial service companies and securities trading create much of the demand for data centers in New York and New Jersey. “[Traders] will spend millions to access data a millisecond ahead of everyone else,” Lynch says. He adds that New Jersey tends to be more popular than New York due to lower power and real estate costs in the Garden State. “Manhattan may be the most expensive place for power in the country.”

Dallas benefits from a business-friendly environment and its strategic location as a city that anchors the southern half of the country. The huge tech industry in Silicon Valley has sparked the demand for data centers there. Chicago has cheap power costs, plenty of major businesses, and a prime location in the middle of the country. But the search is on for cheaper cities, and data centers have recently been established in Portland, Ore.; Denver; Phoenix; Atlanta; Cheyenne, Wyo.; Des Moines, Iowa; and several small towns in central Washington State.

Experts say the data center boom will continue. “I think the market will be solid,” Huffman says. “Even during the downturn, it held up well. The cloud is not up in the sky; it requires real estate to satisfy its needs.”

Bond concurs, noting that the demand will mean more business for the new-construction sector as well. “Cloud providers can’t build facilities fast enough,” he says. “There’s so much demand for space so quickly. There’s an insatiable growth.”

So how can real estate pros get in on the fun?

Those who want to succeed in this niche must cultivate their knowledge of information technology and engineering. “It’s difficult for someone who is just an office and industrial broker to get up to speed,” Huffman says. That’s why Colliers has its own data center division, and its competitors do too, he says.

Outside of a better understanding of the technology, real estate pros should know how the practices surrounding data center transactions vary. One major difference is that prices are quoted per kilowatt rather than per square foot. “For most spaces, the limitations are power and cooling,” Lynch says. “Tenants are procuring output from a provider. It’s like paying for data on a cell phone.”

One upside is “there’s not nearly as much competition as in other sectors, like office,” says Bryan Loewen, head of Newmark Grubb Knight Frank’s data center consulting group in Dallas.

That’s why experts in the field say well-run brokerages with thorough knowledge of the space can pounce on the trend. “It’s an early stage for cloud brokerage. We see it as an opportunity,” Lynch says.

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