The increasing reliance on technology, cloud computing, and the Internet of Things (IoT) has driven exponential growth in data usage and storage requirements, creating significant demand for data center services.
Hence, investing in Data Center Real Estate Investment Trusts (DC REITs) due to the ever-growing demand for data centers can be a sound decision for long-term investors because it represents a new real estate asset class that can be quite different from traditional brick and mortar properties.
Investing in Data Center REITs
The potential for data center REITs is considered to be the “next big thing” in real estate investment because it may offer unique benefits and growth opportunities that are not available with other types of real estate assets.
According to Tim Lin, Regional Data Center Consulting Lead at commercial real estate services and investment firm CBRE, growth trends in cloud computing and digital transformation are driving the demand for data centers, which in turn are fueling the growth of data center REITs.
“In the current high interest rate/recessionary macro environment, data center REITs are a hedge against these global headwinds,” said Lin.
Data center REITs can indeed be considered as a hedge against high interest rates and recessionary macro environments.
In a high interest rate environment, investors typically seek out investments that offer relatively high and stable yields. Data Center REITs provide this, as they typically offer higher dividend yields compared to other types of REITs, such as residential or retail. This makes them attractive to income-oriented investors.
In a recessionary macro environment, many businesses may cut back on their capital expenditures, including investments in their own data centers. However, they may still need to outsource their data center needs to third-party providers, which could benefit data center operators and DC REITs.
Potential Risks Associated with Investing in Data Center REITs
Although investing in Data Center REITs can be a smart move due to the growth potential of the data center industry, it’s important to note that investing always carries risks.
Lin said that while opportunities to invest in data centers particularly in the underserved APAC region remain significant, investors should be aware of some risks that come with investing in this specialized asset class.
Potential risks include:
High capital expenditures; “The high capital expenditures needed to build and operate a data center facility can be a barrier even for large real estate investors,”
Technical upskilling; “The technical expertise and need to keep abreast with technological changes are another layer of challenge,”
Regulatory changes; “Navigating the evolving regulatory landscape in regard to data protection/residency, sustainability or even just developing data centers in certain markets can be daunting.”
Green data center expectations; “Scrutiny on data centers from an environmental perspective is growing and data center operators are expected to be more-than-equal partners to address the climate issue,”
Investing in Data Center REITs carries risks like any other investment, but with proper research, diversification, and risk management strategies, investors can potentially mitigate those risks and benefit from growth trends in the sector.
Future of Data Center REITs
According to Tim Lin, data center REITs offer the important benefit of riding on secular growth trends in the digital economy – 5G/6G, AI, cloud computing, IoT, etc. The exponential growth in data being generated demands ever greater storage and processing capacity, in the form of data centers.
As new technologies and trends develop, Data Center REITs look set to grow along with this trend, and investors can benefit from this growth given the right knowledge and advice.