Demand for data centres globally is high and rising even further. The reason for this is mainly the surge in demand for artificial intelligence (AI) software which has already led to an outperformance of most data center REITs in 2023. This is according to the experts of Hazelview Investments in their latest research report about this special sector of the real estate market.
The market for the construction and operation of external data centers has a new benchmark: in December, US investment company Blackstone and the data center developer Digital Realty announced a cooperation to build four data centers with a total capacity of 500 megawatts at a cost of USD 7 billion. The centers are to be built in Frankfurt, Paris, and North Virginia (USA).
For the asset class of global real estate investment trusts (REITs), such deals are further proof of how high the demand for data center space is worldwide. This is mainly due to the surge in demand for artificial intelligence (AI) software, which is very data-intensive, according to the experts at Hazelview Investments, a global alternative investment manager with a focus on real estate, as they explain this in their new research report on this special sector of the real estate market.
The interest in data center space has led to a record low vacancy rate. In conjunction with rising market rents, this has already led to an outperformance of most data center REITs in 2023. Between the end of 2002 and September 2023, shares of REITs providers that invest in data centers achieved a significantly better return of 15.4% per year than the general global REIT index, the FTSE EPRA NAREIT, at 4.8% over this period.
Global data center market set to more than double by 2030
The rush to data centers has been given an additional boost primarily by the widespread emergence of AI: “Spending on AI software is expected to reach around USD 700 billion by 2026, which should have a positive impact on future revenue growth,” says Claudia Reich Floyd, explaining the segment’s potential.
The portfolio manager for global real estate equities and Head of the German office of Hazelview Investments points out that the market for data centers will expand as a result: from USD 263 billion in 2022 to over USD 600 billion in 2030, as P&S Market Research forecasts.
Cooperations, mergers and acquisitions on the rise
The high demand from investors for data centers has also led to increased cooperation (such as that of Blackstone and Digital Realty), mergers and acquisitions, observes Hazelview. “As we own shares of Digital Realty ourselves, we have already benefitted and see more potential from our engagement in this sector,” points out Mrs. Reich Floyd. “Other data center companies in our portfolio have even more upside.” The REITs experts break down which regions and companies are among the winners in their latest special report “The rapid rise of data centers in the digital age”, which can be found (in German) here.
