Big Financial Firms Seek to Boost Investment In Data Center Sector

It’s been more than three years since DCF first noted the huge influx of investment capital into the data center sector, which has since led to record-setting M&A action and the creation of many new platforms to deploy digital infrastructure.

But rather than abating, the surge in investment may be gaining steam. A new CBRE survey of large institutional investors found that 95 percent plan to increase their capital deployment in the global data center sector in 2022. More than three quarters of investors hope to allocate more than $100 million of equity to the global data center sector for 2022 and nearly half allocating over $300 million.

The reason: Experienced investors perceive data centers as one of the best ways to make money. Investors see a compelling opportunity to gain strong returns on their money by investing in the infrastructure to power the digital economy, a sector with “extremely positive fundamentals,” according to CBRE.

“Investors are flocking to data centers because of the stability they provide as mission-critical infrastructure hubs for global business,” said Kristina Metzger, Leader of Data Center Capital Markets for CBRE in North America. “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.” Data centers is a high-growth real estate sector with extremely positive fundamentals,”

Investor Interest Spans Categories of Development

The Internet is creating a data-driven world. Virtually every business is racing to keep pace with the shift to a digital economy, and all these trends require infrastructure.

Data centers are central to this vision. That’s why the world’s marquee tech companies are adding data center capacity at an unprecedented rate. Building new data centers requires LOTS of capital, and after many years of wariness about the sector, the investment community is all in on funding cloud infrastructure.

Private equity funds are the most experienced investors in the data center industry. Among the newer players are infrastructure funds, which traditionally have invested in projects like airports and toll roads, tend to have longer timelines for return on investment than private equity funds, which have been the prime movers in data center investing. The industry has also seen interest from sovereign wealth funds – state-owned entities with deep pockets – as well as wealth management firms that aggregate funds from affluent families.

CBRE fond that investor interest in the global data centers sector is robust across the spectrum of vehicles and risk, with half of respondents expressing interest in new development, value-add and core-plus offerings in 2022. Other key findings of the survey include:

• Investors intend to increase their overall percentage of data center assets under management over the next five years. Although 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 at 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 due to more intense competition.
• 72% of respondents cited Environmental, Social and Governance (ESG) considerations “highly important” in their overall data center investment strategy.

New Geographies: Silicon Valley, Regional Markets Gain Favor

Historically, the impact of these new funds has been most visible in Northern Virginia, the world’s largest data center market and a focal point for cloud computing infrastructure. Many of the companies backed by new investors have looked to deploy new capacity near “Data Center Alley” in Ashburn, including at least seven new players planning to enter the Northern Virginia market in the next several years.

But the geography of new capital inflows may be shifting. The CBRE survey found that Silicon Valley is now 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. Other primary data center markets favored by investors included:

• Northern Virginia (36%)
• Phoenix (29%)
• Chicago (28%)
• Atlanta (27%)
• Dallas/Ft. Worth (26%)
• New York Tri-State (24%).

Investors see the opportunity for higher initial returns in emerging markets such as Houston, Minneapolis and Boston. This is consistent with DCF’s 2022 Forecast (The 8 Trends That Will Shape the Data Center industry in 2022), where we projected that new investment will spread beyond the top five markets.

“In 2022, the capital infusion will extend to regional markets and service providers specializing in “second-tier” cities and edge computing,” we noted. “There were clear signs of this in 2021, and we’ll see even more significant growth and investment in 2022, along with a high probability of acquisitions. Demand for online services is strong everywhere, and the pandemic has reinforced the case for more distributed IT infrastructure. Meanwhile, core markets are getting crowded and competitive, and new investors continue to seek access to attractive returns in digital infrastructure. Regional markets with business growth and clean energy will be clear winners, along with providers with strong teams and good networks.”