Data Centers: High Demand, Slow Deliveries, Big Development Profits

Data center REITs own and manage highly specialized facilities that house the critical IT infrastructure that powers today’s economy. These properties include a variety of features to help keep servers and data safe, including uninterruptable power supplies, air-cooled chillers, and physical security. A wide variety of companies including Amazon, Apple, AT&T, Google, IBM, Meta, Microsoft, Oracle, and Ubisoft use REIT-owned data centers.

The Nareit Actively Managed Real Estate Fund Tracker tracks quarterly investment holdings for the 27 largest actively managed real estate investment funds focusing on REITs. As of the first quarter of 2024 (the latest data available), data centers accounted for 11.5% of aggregate assets under management; the sector’s weight in the FTSE Nareit All Equity Index was 9.3%. This overweight highlights active REIT managers’ bullishness on data centers.

Data from the Nareit Total REIT Industry Tracker Series (T-Tracker^®) for the first quarter of 2024 (the latest data available) show that data center REITs delivered strong operational performance. Specifically, on average, data center T-Tracker stats show that net operating income (NOI) experienced a 4.2% year-over-year gain, underscoring that data center REITs have more than amply kept pace with inflation.

Data centers typically use megawatts (MW) rather than square feet as their principal size measurement; one MW can generally power 1,000 homes. Green Street indicated that global new leasing activity hit a record in 2023, reaching approximately 4,300 MW. The first quarter of 2024 marked another global leasing record with 1,800 MW of new deals; the U.S. accounted for roughly 80% of this activity.

Continuing developments in artificial intelligence (AI) are expected to fuel demand and shape the future of data centers. Current sector vacancy remains limited and new project deliveries tend to be slow. On average, new developments typically take two to three years to complete; larger projects can take significantly more time. According to Green Street, data center development continues to shine with profit margins that exceed 50%.

• 2.2x: As of June 28, 2024, data center REITs accounted for 9.5% of FTSE Nareit All Equity Index market capitalization; approximately 2.2 times its debut weight on December 21, 2015.
• 2,500 MW: With nearly 2,500 MW of inventory, CBRE Research indicates that Northern Virginia is the largest primary data center market in the U.S.
• $10 million: Data centers are expensive to build. Green Street estimates that the average development cost per MW in the U.S. is more than $10 million.

Below is a list of Nareit member companies from the data centers sector.