Chicago Capital Markets RoundTable: “There Just Aren’t Enough Deals. There is Too Much Capital Chasing Too Few Deals.”

May 3, 2018
by Josh Anderson

CHICAGO, IL – Financing a data center is no easy task. And neither is the decision-making process that a lender must undertake when deciding whether and how to make a go of it. At CapRE’s Seventh Annual Chicago & Midwest Data Center Summit, we convened a panel of leading insiders from the regional capital markets arena to discuss this process. Below is a transcription of that conversation, continuing a previous CapRE Insider Report, and part of a panel titled “Capital Markets Takeaway: What Types of Debt and Equity Sources will Become More Active in 2018?”

Dave Spiewak, Next Tier HD: I wonder if we can move to speak a little bit about transactions, and what kinds of data centers are commanding the highest multiples, lowest cap rates, whichever way you want to think about it. I think that maybe on one end of the spectrum, you’ve maybe got an Amazon-powered shell in Northern Virginia, where the cap rates just seem to keep getting lower, and you have your mid-players who focus on that. And then on the other end of the spectrum you’ve got your managed serviced type of companies, which are lower-multiple type of companies. But maybe we could speak on a higher level about which properties are commanding the best multiples and maybe even which kinds have seen the biggest shift, drop, or increase in cap rates over the past couple of years.

data center summitJoe Junda, Managing Director, CIT: I think that if you look at some of these new buyers, these infrastructure funds are not like private equity. There are higher return hurdles. But if you look at InfoMart, for example, they’re potentially going to get a 4 cap rate for those assets. Now take Dallas out of the equation, because it’s an iconic building. But those three remaining assets? In infrastructure fund? Boy. Those returns are going to be a lot less.

Spiewak: I think that you need to separate what the IPIs of the world are buying from the generality of what the space is. Even the AWS – we’ll call them core-shell deals – they are flat out real estate industrial deals. So I think that it’s more kind of, how you view the Boeing type of deals, out in Oregon. That’s a turn-key deal. It’s infrastructure and it’s real estate. So it’s a data center deal. And when that’s not being acquired an infrastructure fund, how does the rest of the industry view that?

Junda: Well, the reality is that there just isn’t enough deals, Dave. There is too much capital chasing too few deals. And everyone is fighting for that platform or that next deal. And unfortunately it makes these investment bankers run auctions, where they get 20 or 30 people show up to them. And that drives  the price up.

Spiewak: So let’s take two deals. Chicago. Take North Lake, right? Carter Validus acquires the property. And Digital Realty acquired that from Carter Validus. I don’t think that was even much of a data center real estate deal. That was an offensive play in this market, that they needed to buy own that asset, from a market perspective, as well as it helped them to continue to “Feed the REIT” as they had to do. And then going to Infomart, which is an $800 Million deal, that was an offensive and defensive acquisition in that market. Equinix needed to control the interconnectivity.

They now control all of the colos in that property going forward, because once their renewal options expire, they’re gone, they pick up, they organically can grow their business. But what happens though is because of what those assets are, you’re going to get a feeding frenzy of others who have to bid on them. Again, I think we’re in a place right now in debt and equity, where the business is changing so quickly because there is so much capital coming in and there’s such cheap capital that it almost takes the illogical players out of the equation. And they don’t have an opportunity to fight for good deals.

For more from Junda and Spiewak as well as their co-panelists, check out previous CapRE Insider Reports covering earlier parts of this panel:

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