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The data center investment opportunity

July 29, 2024 | 6 min read
Casey Miller
Managing Director, Portfolio Management
Sebastian Dooley, CFA
Senior Fund Manager
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AT-A-GLANCE

  • The data center investment opportunity is characterized by enormous demand that’s outpacing supply and an unprecedented amount of capital required.
  • The sector is becoming increasingly attractive to institutional investors. Advantages include portfolio diversification, long-term stable cash flows from high- quality tenants, and scalability.
  • For most investors, a fund investment is likely the most viable way to enter the data center market today, considering that a single facility can cost several hundred million to upwards of a billion dollars.
  • Given the highly specialized nature of the data center industry, experience, access to technical knowledge, and existing relationships with the end users are critical to successful execution.

The data center industry is experiencing explosive demand growth driven by expanding use of technology and structural shifts in how data is consumed. Developers are building but they can’t keep up with demand—driving vacancy rates to all-time historic lows and rents to rise. The amount of capital required to develop the capacity to fill forecasted demand is unprecedented in the industry.

Those dynamics create a landlord-friendly market attractive to institutional investors looking for opportunities to diversify their portfolios with a viable alternative asset class. Advantages of the data center sector include the opportunity to invest in an alternative asset class, long-term stable cash flows from high-quality tenants, and scalability. For most investors, the most viable way to enter the data center market today is via a fund investment.

Opportunity drivers

Already exponential, demand growth is accelerating

Growth in demand for data center capacity is fueled by surging digital data creation, cloud computing, and the widespread adoption of new technologies like artificial intelligence (AI). AI workloads, such as machine learning and natural language processing, are exceptionally computationally intensive. Training sophisticated AI models like GPT-4 can require thousands of specialized processors running for weeks. As AI proliferates across industries, the need for infrastructure to support these workloads is skyrocketing.

Traditional and cloud workloads continue to grow rapidly as well. Spending on cloud infrastructure is projected to reach $156.7 billion by 2027, according to IDC —over a third of total compute and storage infrastructure spend. In fact, hyperscale companies’ massive and growing cloud platforms are subsidizing their AI investments, as cloud businesses are typically very profitable. (For example, Amazon’s cloud business, AWS, is the company’s most profitable segment. )

Demand is outpacing supply

The amount of data center capacity coming online is also rising, rapidly—but not as fast as demand. As a result, vacancy rates are at all-time historic lows and rents continue to rise.

EXHIBIT 1: Data center capacity in the U.S. is growing, but not as fast as demand

Commissioned power
Under construction
Vacancy
Data center capacity in the U.S. and how it's growing quarter over quarter, but not as fast as the demand.

Source: datacenterHawk, 4Q 2023

The data center industry is experiencing explosive demand growth driven by expanding use of technology and structural shifts in how data is consumed. For more of our thoughts on the investment case around data centers, read our full perspective.

Real estate

Footnotes

Source: IDC, October 2023. Source: Nasdaq, January 2024.
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For Public Distribution in the United States. For Institutional, Professional, Qualified, and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations

Risk Considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. Data center properties and will only be attractive to a unique type of tenant. A limited tenant base increases the risk of vacancy. Additionally, a property designed to be a data center property, may be difficult to relet to another type of tenant or convert to another use. Thus, if operating a data center were to become unprofitable, the liquidation value of properties may be substantially less than would be the case if the properties were readily adaptable to other uses. 

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