Data centers have become an essential component of U.S. and global infrastructure, and investors have noticed: Our teams continue to see more investors in the data center asset class. Cap rates are in the low-to-mid-fours on a seven-year lease to B or C credit. International capital investors, particularly from Korea and Singapore, are major buyers, a trend that has been emerging for years. Mapletree (of Singapore) has just purchased a Bank of America data center outside of Richmond, VA, for $208 million. Per data from Real Capital Analytics, international buyers accounted for 46%, 54%, and 59% of buyer volume in 2019, 2020, and 2021 year-to-date. REITs have been net sellers in recent years, while institutional investors continue to be net buyers of this property type.

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As a specialized asset class, data centers require unique access to resources to be attractive to both tenants and investors. Available land, reliable power, and connectivity are three of the primary items that data center providers and hyperscale companies are looking for when doing site selection. Power is essential since these centers use tremendous amounts of it and having access to low-cost sources is important. Connectivity to fiber, particularly long-haul fiber that connects state-to-state, creates a deeper tenant pool. Also desirable are access to water for cooling, environmental factors such as cool nights and days for ambient air, and locations that are somewhat safe from natural disasters.

Virginia is a top data center market, with a low cost of power and sub-c (submarine cable) connectivity to Europe. California, in Silicon Valley and Los Angeles; Oregon; Hillsboro, Texas; Utah; Chicago; and Phoenix are all major markets as well. Data center tenants look to be located as close as possible to end users so to reduce latency (the delay before a transfer of data begins following an instruction for its transfer).

While investors have sought to buy data centers, the real opportunity is in development. But unlike in life science, where office-to-lab conversions are proving successful and plentiful, industrial-to-data center conversions make less sense. Colliers has found that users today are going for purpose-built facilities because it generally isn’t worth it to them or to investors to go through a conversion. Facilities get outdated, technology is ever-changing – which is the case with data centers too, footprints change, and the biggest users have multiple locations for back-up and security issues.

About one-third of the power in the world is used by data centers, leading to a major push for energy efficiency and a reduced environmental footprint. Cryptominers are a new driver for data center demand, but many of these operations will go with the cheapest options available, such as an older center or any building with the necessary power/cooling. If industrial properties can’t often be easily converted to data centers, they may be remade instead to house semiconductor manufacturing returning to the U.S., since these users need space now.