The Real Deal Los Angeles

Investors show strong demand for data center properties

The sector could be strong enough to weather a downturn
July 23, 2018 11:30AM

A data center (Credit: iStock)

Investor interest in the data center sector remains strong, and expected future demand for their services means the sector might be strong enough to weather a downturn at the end of the cycle.

The sector has seen a handful of major deals this year as firms expand and acquire interests in data centers, according to National Real Estate Investor. Brookfield Infrastructure plans to buy AT&T Inc.’s data centers for $1.1 billion. EdgeCore Internet Real Estate, a new company, announced in February it was planning to spend $2 billion on development in North America.

Investment in U.S. data centers that touched record levels last year has continued to surge. Chicago climbed to become the third largest market in terms of inventory, but still was short on supply, according to a CBRE report.

Leasing was at an above-average pace in the first quarter, with solid rent growth in the 2-3 percent range. CoreSite, a company that owns data centers around the country, recently expanded its lease at One Wilshire in Los Angeles. The 30-story tower is a so-called carrier hotel, a high-tech property with robust telecom infrastructure meant to accommodate data centers.

Some real estate investment trusts specializing in only data center properties have posted double-digit growth this year in funds from operation, versus growth of less than 3 percent that many traditional REITs are experiencing. Funds from operation is a general measure of cash flow into the trust.

Green Street Advisors counts five such REITs with a profit margin over 60 percent, according to NREI. Their total return for June was 6.7 percent; it was down 3.1 percent through the first six months of the year. The sector saw 28.4 percent returns last year. [National Real Estate Investor]Dennis Lynch