Data centres: Empowering a data-driven world

Data centres have become critical components of our growing dependence on technology. Surging demand coupled with high barriers to entry for new supply and a global search for attractive investment returns have brought the sector to centre stage.

Society relies on digital applications for work, education, transportation, entertainment, healthcare, and just about every other aspect of our modern lives. Through these digital applications, we are creating and consuming massive amounts of data. The amount of digital data expected to be created over the next five years will be more than double the amount created since digital storage was first invented in 1956¹.1 By 2030, the number of internet-connected devices is expected to grow by 242% compared to 2019.²

All that data is processed and housed inside a data centre, so it should come as no surprise that demand for data centre capacity is at an all-time high and continues to rise, having grown 137% in the last year alone.³ Data centres are not only real estate, they are the infrastructure lifeblood of the modern economy. Although leased data centre capacity has more than tripled since 2015⁴, vacancy is at an all-time low. Given the growing awareness of the significance of data centres to the economy, investors are increasingly looking for ways to participate.

The elements that appeal most to investors today include:

• High demand for quality data centre space—but limited supply of data centres able to keep pace with exponential data growth from developments in outsourcing, cloud adoption, and emerging technologies.
• Long-term leases and credit-worthy tenants have led to a stable cash flow and attractive returns in both up and down markets.
• Access to a specialized product type to diversify their portfolio.

Structural demand is driving investment opportunities

Data centres present a unique opportunity for real estate investors. With growth and defensive attributes, the data centre industry has proven resilient in both economic downturns and periods of economic expansion. Low correlations to other assets, a favourable risk/return profile, and new liquidity from institutional capital make data centres a portfolio component worth considering. Longer leases, often in excess of 10 years, offer investors exposure to cash flows from high-quality credit tenants at higher yields than most other property types.

For long-term investors, stabilized data centres may offer some inflation mitigation. Further, while sourcing opportunities in growth sectors during economic uncertainty is challenging, data centres are among the few areas where the structural growth story is intact.

The options to gain investment exposure to the data centre sector are scarce due to limited offerings—core investments rarely trade and the pool of highly-technical developers who have capacity to build hyperscale data centres is thin.

Investors who partner with a strong developer may potentially achieve both an enhanced return and continued access to this sector. With continued supply and demand imbalance, tenant preference to do repeat business with existing developers, increased headwinds to procure suitable sites with necessary power and fibre, and the long lead time on equipment necessary to commission a data centre, the sector is pried to further strengthen. This presents a valuable opportunity in the develop and lease-to-core strategy, which we believe will prove advantageous for both tenants and investors going forward.

¹ BusinessWire, Data Creation and Replication Will Grow at a Faster Rate Than Installed Storage Capacity, March 24, 2021; IBM.
² Statista, July 2022.
³ datacenterHawk, 4Q 2022.
⁴ datacenterHawk, September 2022.

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