The Hot New Trend in Commercial Real Estate? Renting to Data Centers

U.S. real estate developers 'are having a hard time keeping up with demand,' reports the Los Angeles Times, 'as businesses in search of secure spots for their servers rent nearly every square foot that becomes available...'

Construction of new data centers is at 'extraordinary levels' driven by 'insatiable demand,' a recent report on the industry by real estate brokerage JLL found. 'Never in my career of 25 years in real estate have I seen demand like this on a global scale,' said JLL real estate broker Darren Eades, who specializes in data centers...

The biggest drivers are AI and cloud service providers that include some of the biggest names in tech, such as Amazon, Microsoft, Google and Oracle. With occupancy in conventional office buildings still down sharply following the impact of the COVID-19 pandemic and property values falling, data centers represent a rare ripe opportunity for real estate developers, who are pursuing opportunities in major markets like Los Angeles and less urban locales that are served by plentiful and preferably cheap power needed to run data centers. 'If you can find a cluster of power to build a site, they'll come,' Eades said of developers. Construction is taking place at an 'extraordinary' pace nationwide and still not keeping up, the JLL data center report said. [Data center] 'Vacancy declined to a record low of 3% at midyear due to insatiable demand and despite rampant construction.'

Development increased more than sevenfold in two years, with the pipeline of new projects leveling off in the first half of 2024, a potential signal that the U.S. power grid cannot support development at a faster pace. But when projects currently under construction or planned are complete, the U.S. colocation market, in which businesses rent space in a data center owned by another company for their servers and other computing hardware, will triple in size from current levels... Real estate investors and landlords are being drawn into the market because demand from tenants is high and they are likely to renew their leases after shouldering the costs of setting up data centers. 'They invest in their space and in your space and they tend to stick around longer,' said Mark Messana, president of Downtown Properties, which owns offices in Los Angeles and San Francisco. 'As we all know, the office market is struggling a little bit, so it's nice to be able to have some data customers in the mix...'

Power demand for computing is growing so intense that it threatens to strain the nation's electrical grid, sending users to remote locations where power is plentiful and preferably cheap. Data center developers are working in Alabama, the Dakotas and Indiana, 'traditionally states that wouldn't have data centers,' Eades said.

The article includes 'the mother of all data centers' in the western U.S. — a 30-story building where 'thousands of miles of undersea fiber-optic cables disappear into an ordinary-looking office tower.' Once a prestigious location for businesses, 'The recent departure of a law firm that had been in the building more than 50 years cleared out five floors that will quickly be re-leased to data tenants, said Eades, who represents the landlord...'

To retrofit the building for data centers, 'two elevators were removed so the empty shafts could hold water pipes used to help keep the temperature cool enough for the heat-producing servers' — and developers are happy rents 'can be double what they are at newer downtown office high-rises, according to real estate data provider CoStar...

'By 2030, data centers could account for as much as 11% of U.S. power demand — up from 3% now, according to analysts at Goldman Sachs.'

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