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Pandemic Led Major Investors To Dip Their Toes Into Data Centers. Now They’re Diving In

The pandemic triggered a flood of capital pouring into data centers, and industry insiders say it isn’t stopping anytime soon. 


The coronavirus helped catapult data centers from a niche alternative asset class to a growing focus for the world’s largest real estate investors.

While work-from-home, exploding e-commerce, Zoom happy hours and other pandemic-driven accelerants to digital transformation drove demand for data centers and highlighted the importance and resiliency of digital infrastructure, data centers also turned into something of a safe haven for large institutional investors to deploy capital as previously reliable asset classes like hotel and office faltered and suddenly faced uncertain futures. The result has been a massive surge in investment and a growing number of investors entering the space.

Now, even as hotels, office and other pandemic-battered sectors have begun to recover, industry insiders and a newly released survey indicate that real estate investors aren’t just sticking with data centers — they’re doubling down.

“The investment appetite is stronger than ever going into 2022 — we see it every day," said Ali Greenwood, executive director of Cushman & Wakefield’s data center advisory. "We get more calls than we've ever gotten through 2021 and now to 2022 from the likes of sovereign wealth funds, larger investment groups and other prominent funds that are putting together specific funds earmarked for mission-critical or data center space."

"We've never had such a large pool of investors that are looking to deploy capital, and I just don't see that stopping," Greenwood added. 

In a CBRE survey of major real estate investors with data center holdings conducted in January, 95% of respondents indicated that they planned to increase their capital deployment in the sector in 2022. Not a single one of the 115 respondents planned to decrease their data center investment. Although half of those surveyed had less than 5% of their total holdings in data centers, 4 out of 5 wanted to increase their exposure above 5%. 

Experts say the increase in investment volume brought on by the pandemic was dramatic, particularly throughout 2020 and the first half of 2021. Data center REITs surged on public markets, and real estate investors who had typically been reluctant to dabble in the highly technical and specialized data center market attempted to find inroads.

Kristina Metzger, executive vice president of CBRE’s data center capital markets group, said the brokerage saw an unprecedented surge of new investors considering data center deals. 

“On the average listing that we take to the market, we saw an 80% increase in [nondisclosure agreements] executed in the first half of 2021,” Metzger said. “There was this huge push for getting more educated on this space, and the markets kind of opened up.”

The enormous investor appetite for data centers, even among blue-blood institutional investors, was perhaps most apparent in the record-setting merger and acquisition activity seen in 2021 and continuing into 2022. Data center REITs QTS, CoreSite and CyrusOne were all taken private — by Blackstone, American Tower and KKR, respectively — in blockbuster deals that all exceeded $10B. 

If the pandemic sparked more mainstream interest in data centers among real estate investors, will that capital be migrating back into more traditional asset classes as the markets for core hotel and office holdings trend toward recovery? According to Jonathan Atkin, the global head of communications infrastructure investment research at RBC Capital Markets, this has played out in the public markets for data center REITs and could be an indicator of what’s to come in the real estate capital markets. 

“What the tape seems to be telling us is that data centers were seeing less investor interest than other asset classes based on things getting back to normal with less work-from-home and hospitality and other areas of the economy that had been struggling starting to pick up,” Atkin said. “So, recovery has diverted investor interest a little bit away from data centers based on that notion. “

But most experts who spoke with Bisnow say that far from exiting the data center space, almost all the new entrants are looking to buy in further.  

“Investors perceive that their own portfolio will have a greater percentage of data center assets moving forward, and that's what they're looking to accomplish,” CBRE’s Metzger said. “It's going to take a long time to get the scale of office or industrial or even retail, if it ever does, simply based on size of the market. We're just not there yet. There's not enough transaction volume to where you could make a meaningful impact or dent relative to the size of those greater investment markets.”

The overall data center market is minuscule compared to primary asset classes. Total data center property sales totaled only $5B during a very robust 2021. Relative to retail developments, or offices or even hotels, there just aren’t that many data centers.

Meta's proposed data center in Kuna, Idaho

While demand for data center space is at record levels, the existing inventory and development pipeline can’t keep up with investor appetite. There is far more capital that wants to be in data centers than there are opportunities to deploy it, experts say. With supply chain and labor constraints impeding the data center development pipeline, industry insiders say this isn’t going to change any time soon. 

This difference in scale helps explain why experts are confident that investor capital will stay focused on data centers as other sectors recover. If major investors reallocate even a fraction of a percent of their overall portfolio into data centers, that represents a massive influx of capital. 

Industry insiders say they’re witnessing maturation of the market, as major players who may have only entered the space two years ago are becoming more sophisticated and demonstrating willingness to tackle more complicated or riskier deals or financing development in new geographic markets. 

Metzger says she is seeing investors in passive segments of the market — such as so-called powered shell data centers where the investor has a relatively straightforward relationship with a single tenant — now looking to get into deals that require them to be more involved with managing tenants or operational aspects of the data center. With more suitors than opportunities, she says, these more complicated investments are the only way many investors are able to find deals. 

“Investors have gotten a lot more comfortable with those segments of the asset class and those types of operating models. They’ve had to get comfortable there,” Metzger said. “This should open up liquidity.”

Similarly, the investor pool outpacing opportunities is pushing investment across the risk spectrum, with a willingness to invest in core-plus, value-add or new development, even in new markets. Core product — generally featuring a long-term lease with a single investment-grade tenant like Amazon Web Services — has become the almost exclusive domain of investors with enormous liquidity like sovereign wealth funds. Experts say the fact that other investors priced out of core are clamoring for other opportunities reflects a market that is moving toward the mainstream as fast as a new product can be built.

“The investor class is even widening. Five years ago, when new investors would come into the space, they would only want a single tenant, triple net, 100% leased, 15-year asset, whereas now you're seeing data center investors that are entering the space more broadly and also focusing on value-add, core-plus and development,” Cushman & Wakefield’s Greenwood said.

“Not only is the investor pool deeper than it's ever been, but the appetite is also stronger than it has ever been, and we’re seeing a broadening of how capital is deployed.”