Today's hottest commercial real estate in the U.S. is no longer a hotel or office building, but a power-hungry data center, often located in places like Northern Virginia, Columbus, Ohio, and Salt Lake City, Utah.
* Sean Farney, vice president of data center strategy at real estate firm Jones Lang Lasalle, was quoted as saying: "It's all about AI right now. The most immediate impact is that there is a huge and new demand for the support and hosting of AI technology. ”
He believes that the release of ChatGPT at the end of 2022 marks a turning point for the industry. Because it has prompted companies like Microsoft, Google, Meta and others to launch their own AI products faster, it has also fueled a gold rush in the commercial real estate sector, which has previously been in the doldrums, especially in office buildings.
In recent years, companies have been scrambling to lease data center space in major markets such as Northern Virginia, and demand has even spread to secondary and emerging markets such as Central Ohio. Amazon Inc. is developing a $7.8 billion project in central Ohio.
Patrick Wilson, a manager at CenterSquare Investment Management, said that since the rise of remote work in 2020, there has been a massive influx of money into data centers, communications infrastructure, fiber, cell towers and related technical support. Much more money is flowing into this vertical than in any other commercial real estate sector.
According to Farney, most of the funding comes from "mega-corporations" with deep pockets, including Wall Street's "Tech Seven" and companies like Oracle. These big tech companies are building their own data centers around the world at a compound annual growth rate of 20% to 30%. You can see that they have invested as much as $1 billion in new facilities.
Overall, Jones Lang Lasalle has tracked more than 53 gigawatts, which is equivalent to "providing a year's worth of energy for all households in the San Francisco metro area."
However, given that power and land constraints have become major hurdles for the industry, data center growth won't happen overnight. In a recent example, Google plans to spend $200 million to build a data center in Santiago, Chile, which has yet to begin construction, but the permit was partially revoked by an environmental court this week. The court asked Google to revise its application to take into account the effects of climate change, particularly on the capital's water supply.
Ermengarde Jabir, senior economist at Moody's, believes that more offices could be converted to data centers in the future, given that there is a lot of underutilized space in suburban and urban business districts that can add additional capacity to data centers.
The tech giant is one of the main owners of data centers in the United States, but not the only ones. Their demand is so huge that they lease space from other companies.
Digital Realty Trust, Equinix, and other real estate investment trusts, have been significant players in the industry for many years. These incumbent players need to find ways to compete in the AI gold rush, while also dealing with legacy data center assets that are at risk of becoming obsolete.
And in recent years, as global demand has surged, major infrastructure** have jumped on the bandwagon, including Brookfield Infrastructure Partners and Blackstone**, making a series of big investments in data centers.
We believe AI will take a decade or more to build, and while global data center capacity is currently 50 GW, we will double that capacity to 100 GW in the next six to ten years," Marc Ganzi, CEO of DigitalBridge Group, said during the earnings call** session in February.
"We believe that data centers are becoming AI factories where data is the input and intelligence and insights are the output," Ganzi said. ”