Traditional real estate is overrated. Now that we are slowly turning almost everything digital and online, data center real estate is the next big thing expected to boom this 2021.
When the COVID-19 global pandemic forced jobs and education to be based online, a demand in data center real estate increased since more people are either shopping online, working from home, or turning into online classes.
What is Data Center Real Estate?
The Data Center Dynamics described data center real estate as "investment trusts where all or the majority of the trust's revenues come from leasing data centers." Some generate income mainly from data centers, while others only have it as a part of a diverse real estate portfolio.
Unlike the usual residential or commercial real estate properties, data center buildings don't need to be extra appealing to the eye. This kind of property is normally huge, boxy, unremarkable, and does not boast special amenities. But data center real estate is essential to how we live our everyday lives as it stores data that fuels our online activities.
While data center real estate has been around since the 1960s, it was just recently when it has become an income-generating investment trust.
Data Center Real Estate Growth
In recent data from the commercial real estate services and investment firm Coldwell Banker Richard Ellis (CBRE), data centers are expected to grow this year.
But unlike traditional real estate properties, data center real estate is not measured per-square-foot, but through power.
"We know there's already 500 megawatts of new build coming online now, almost 70% of which is pre-leased. And so we do believe that 2021 might be the record year, and then we'll accelerate thereafter," said CBRE senior economic advisor Spencer Levy.
"What's going to be happening soon is the rise of what's known as edge computing, getting closer to the consumer, because of self-driving cars, because work from home. It's yet another accelerant of the need for more data center space," he added.
In Ashburn, Virginia alone, more than a dozen data centers are gathered together, making cranes and bulldozers a normal sight in the area. Levy explained that it is important for data centers to huddle together as it allows faster communication, networking effects, and access to cheap power.
"This reminds me of New York City in the early 1920s, where everybody clustered near Wall Street because being close together was important, and it is exactly what we're seeing from a data perspective here in northern Virginia," Levy said.
Northern Virginia is now considered the largest data center market in the world with more than 60% of the current construction in the United States.
"Why are we seeing it spread from the big markets like New York, like Silicon Valley to the smaller markets? Cheaper power, redundancy," Levy said.
Data center real estate became the highest-performing REIT sector in 2020 with 21%. While the booming real estate sector is expected to grow even more this year, they also fall by 11% last year after some companies froze their IT budgets due to the COVID-19 pandemic.
