Mission-critical data centers: a top choice for commercial real estate investors

What is it that makes a commercial real estate investment so appealing? Is it the permanency of the tenants, positive sector trends or barriers-to-entry? If you said, “all of the above,” then chances are you have either made, thought about making or are about to make an investment into the data center space.

Tenant Retention

Data center tenants have historically exhibited much higher tenant retention when compared to more mainstream commercial real estate property types (multi-housing, industrial, etc...). One of the reasons behind this phenomenon is that, while rent paid to the landlord is usually one of the biggest expenses a user has, in the data center world, rent pales in comparison to the upfront cost of the equipment and the complexity (and cost) associated with physically replicating the space elsewhere.  

Positive Sector Trends

It is no exaggeration to state that data centers are the backbone of the digital age. Be it connecting people through social media, facilitating an online transaction or simply streaming audio or video, data centers make it all possible. Current technology has made a myriad of necessities available at the touch of a button, including everyday tasks such as ordering groceries, making a hotel reservation, listening to your favorite song, designing a photo album or even hiring a babysitter. As cloud computing continues to become mainstream, the demand for data storage and retrieval will only increase. Additionally, with the emergence of Hybrid IT (the blend of cloud-based and on-premises IT services), there is an uptick in demand for users seeking data center space.

Barriers-to-Entry

The main factors limiting the development of data centers are the significant infrastructure requirements (fiber optic lines and the power grid) and construction costs. For optimal carrier neutrality, data centers need to have multiple connection points to fiber trunk lines which are expensive to run and limited in availability. To decrease downtime and support disaster recovery space, dual power feeds are critical.

And then there’s the cost. While data centers often look like traditional office or industrial buildings from the outside, it is what’s on the inside that really matters. To be certified as a Tier III Data Center (the preferred category for enterprises), a facility need to maintain an availability of 99.982 percent, which requires redundant chillers, cooling towers, UPS and generators.

Outlook

The data center industry is poised for considerable growth over the near-term. 

• Data Creation:  The world’s digital footprint doubles roughly every two years.  CISCO is forecasting a 386 percent increase in data generated between 2016 and 2021. 
• Cloud Migration:  The exponential growth of data creation has forced data creators to strategically consider their options. As users of data expect an “on demand” response, cloud computing will increase.
• Hybrid IT:  Companies that had previously built and operated their own data centers are shifting to the cloud and outsourced solutions, better aligning business and IT interests. Hybrid IT is going to become a best practice across businesses of all sizes. 

As a commercial real estate investment, data centers provide income durability and long-term capital appreciation – a one-two punch for today’s market.