CAPRE Exclusive: Will the Flood of Capital in Data Centers Find a Place to Settle?

NEW YORK CITY — An influx of capital from a wide variety of sources has been making headlines as of late. Maybe it’s not surprising – the trendlines on compute-heavy applications are all going the same direction, and data centers are maturing as an asset class.

Recent major acquisitions and capital infusions into the traditional data center space include Colony Capital acquiring Digital Bridge Holdings for $325 Million USD and a $3 Billion USD haul by Compass Data Centers from RedBird Capital, the Ontario Teachers’ Pension Plan and the Israeli Azrieli Group; and it seems as though everyday a new AI or IoT startup announces a multi-million dollar capital infusion. But as we head into the second half of 2020, some of us at CAPRE can’t help but wonder if the industry is nearing the point of too much capital.

For some expert advice, we first looked to Dan Bryson, Executive Vice President for Finance at JLL Capital Markets and a frequent speaker at CAPRE’s Data Center Summit, who believes that whether or not there’s too much capital entering the space will depend on your perspective.

Dan Bryson,Executive Vice President for Finance,  JLL

“What we see generally is that if you look at 2018, the most current numbers, the absorption and leasing was at record level across all major domestic data center markets…those are big, big numbers,” he shared. “What that tells us is that there is leasing, there is demand, and a lot of it is by hyperscalers, but there’s a lot of demand for this product. That drives investment both on the debt and equity sides.”

According to Bryson, the mid-year numbers for 2019 are still being counted, and he anticipates that when all is said and done, the figures will probably reflect a bit of a slowdown, but there’s strong demand for capital across the country. “In the last 3 years, we’ve seen a significant increase in capital coming into this space, both domestic and internationally, debt and equity,” he explained. “People read the papers, they read about IoT, AI, driverless cars, etc. They read about all of these different things going on, and lenders and investors think of that as a place where they should place some money. So that’s generating buzz.”

Bryson shared that his team is seeing a lot of sovereign wealth funds looking into the data center business. “Data is the new oil. People want to make sure they’re taking advantage of that, getting into the business at a good time,” he quipped, but then offered a word of caution. “A lot of capital is coming in, but it’s very conservative, patient, and careful capital. The equity capital is the sovereign wealth funds, the international funds. These entities are capable of writing big checks for hyperscale deals, and there’s a much better execution on the buy side.”

This perspective led us to our next question – is the current level of in-bound capital sustainable? David Cervantes, Senior Vice-President at CBRE, for one, thinks it is, and might even be a necessary stop on the journey of this growing asset class.

David Cervantes, Senior Vice-President, CBRE

“The old rules and the Wild West of early entrepreneurship is certainly over,” Cervantes shared in an email with CAPRE. “The new regime of investors have a very, very low cost of capital. Pension-backed infrastructure funds are moving into the space and many incumbents cannot compete with that long-term investment horizon. I don’t feel it is a race to the bottom on yield; I believe it is just a coming of age for an increasingly important asset class.”

Even if it’s not too much too fast, some insiders are cautioning about a lack of due diligence. For example, Dan Thompson, Director at 451 Research shared that he has been approached by investors who don’t know really know much about data centers, but know that they want to make an investment.

“We’ve seen individuals with a history in data centers and who are looking for a new venture, aren’t getting funding from usual suspects and are now branching out to see who can give them money,” he shared. “This has been interesting because some of these guys come in and you tell them a specific market may not be the best investment, but they want to go for it anyway. People are jumping in that are under-educated. I don’t know that it’s concerning, necessarily, but it’s definitely a bit odd.”

Thompson clarified that the data center industry in general grows at about 8-9% across the U.S. and globally every year, so a bet on this vertical is a pretty reliable one, but market by market, it can vary pretty dramatically. “Ashburn and Phoenix are cooking, but it can be dodgy in other markets,” he added.

Dan Thompson, Research Director, 451 Research

Of course, much of the inbound capital is coming from infrastructure investors, who now see data centers as part and parcel with their typical assets. For example, Brookfield Infrastructure Partners acquired AT&T’s data center portfolio for $1.1 billion USD earlier this year, quickly launching a new company, called Evoque Data Center Solutions. Evoque DCS hit the ground running to fulfill its mandate of providing colocation services in over 30 data centers.

To clear things up a bit, CAPRE wanted to speak to someone on the data center side, so we connected with  Jake Ring, CEO at GIGA Data Centers, which came on the scene in late 2018, about this sentiment. So we asked Ring, is there too much capital looking for a home in our industry or not?

Jake Ring, Founder & CEO, GIGA Data Centers

“No one likes competition,” chuckled Ring, who was pretty bullish. “If you do a back of the envelope calculation, you can see that in the North American market, there’s a need for 200-250 megawatts per month of new capacity…with cloud access, being able to store more things, and being able to use higher capacity for analytics of high-performance computing on demand, I can see that there’s the need for data centers. Certainly for upgrading them. If we’re going to have 21st century technology, we need 21st century infrastructure.”

Ring then brought the conversation full circle, touching on one of the most highly anticipated moments in the data center arena — the rollout of 5G — to illustrate his point. “If there really is a reworking of the network for the USA, that is going to be spanning the entire country with a 5G roll out starting in smaller parts of major metro areas, there’s going to be a need for reworking the entire distribution network,” he explained.

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