“Capital is Following Leasing” | Domestic Investment Opportunities Round-Table at CAPRE’s Mid-Atlantic Data Center Summit
LEESBURG, VA – CAPRE’s Seventh Annual Mid-Atlantic Data Center Summit explored many sides of the data center capital markets arenas. One of the concluding panels, titled “Domestic Investment Opportunities: How Have Growth Market, Sale Leaseback, and Sources of Investments Funds Changed in 2019 versus 2018?” dove deep into a few topics that have been grabbing headlines recently.
For example, about halfway through the panel, Moderator Sami Badri, Senior Analyst at Credit Suisse asked panelist Dan Bryson, Executive Vice-President of Finance at JLL to shine some light on how the big picture is changing. “Dan, can you both chime in on how lease terms have evolved over the last five years?” asked Badri. “What was the hot line-item you saw five years ago and what is it today?”
“Well the difference in this current environment is the impact of the Internet of Things and the dynamic growth of this business,” replied Bryson. “2018 was a huge year across the Tier I markets, and in some case Tier II and tertiary markets as well. 2019 is a little bit below that. I think we’re at 11 megawatts versus where we were in 2018, so we’re a little bit behind. But nonetheless, capital and the banks on our side — on the debt side — is following the leasing. If you don’t have the leasing…you have to underwrite around that. And you can’t just assume that with a 10 year loan, that that lease is going to cover it.”
At that point, Badri changed direction a bit. “Transitioning more to sources of funds that enter the industry, how have the sources of funds changed in the past 5 years and what is materializing in the market today?” he asked, looking to Bryson’s co-panelist SherAfgan Mehboob, Managing Director at Guggenheim Partners.
“I touched on this before, but the traditional private equity underwriting to 25%+ terms is really where the data center was for a long period of time,” replied Mehboob. “Then, all of a sudden, the asset class really started to change. As we started to look at longer terms and the tenants started to change. Funds who traditionally invested in airports and etc., started to say, well, if we can manage our risk (and take a risk that’s slightly more than the very boring airport, and we can take a slightly higher yield and get a better return), why wouldn’t we do that?”
According to Mehboob, this has happened across the various capital verticals. “As one took a risk, another said, Why not?” he explained. “Today we’re in an environment where the majority of these funds have some percentage – 20-30% – dedicated to data centers and communications infrastructure. Sometimes these are broad definitions that they’re happy to define as time goes on.”
“I think the one interesting aspect of this new type of fund is that they have continued to evolve that definition,” asserted Mehboob. After all, in the very beginning, it really was just wireless towers, and other clear-cut communications infrastructure that fit into the bucket. “Then it became only these long-term leases. And now you’re slowly seeing some other aspects of data centers.”
The bottom line, by Mehboob’s estimates, is there is a very wide spectrum. “No two leases are created the same, no two data centers at the same, and certainly no two data center companies are created the same,” he illustrated. “I’m of the view that some of this is long-term value versus that will exist over a long period of time, but gets a better yield and a better return.”
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