North American investors have a voracious appetite for backing data center development — matched only by the incredibe demand and incredibly deep pockets of the industry’s hyper scalers like Alphabet, Amazon, Apple, Meta, and Microsoft.
A new survey and analysis from CBRE points to the exactly how robust the demand is for new data centers. Total transaction volume for North American data center asset sales jumped 29% in 2023 over the previous year to reach $4.8 billion. The growth was a result of bigger ticket spending from investors with price tags rising even as deal values decliend by 33% over the year-ago period. And investors expect their commitments to rise in 2024.
Projected Capital Allocations to Data Center Investments 2024. Image Credit: CBRE
Rising interest rates and lending volatility did sideline many would-be sellers over the course of the year. However, Real Estate Investment Trusts (REITs) seeking to fund their development pipelines, jumped into the fray, fueling the overall market. These large deals underscored the market’s strong fundamentals and strategic importance in the digital age.
Record tenant demand, historically low supply, and continued positive rental growth attracted both equity and debt investors to the data center sector. Despite challenges posed by inflation and interest rate expectations, investors remained eager to transact. Many shifted their focus to development opportunities, underwriting significant rental growth for the foreseeable future.
And financing poured in from all corners. Traditional commercial real estate lenders, infrastructure funds, project finance, TMT lenders, debt funds, and life insurance companies all played a role in backing these assets. Investors with a low-leverage profile, favoring a 35% to 50% loan-to-value ratio, dominated the market for stabilized assets, highlighting the sector’s attractiveness to a wide range of financial players.
Notable transactions in 2023 included several high-profile deals by Digital Realty — including a $7 billion joint venture with Blackstone to develop hyperscale data centers in Frankfurt, Paris, and Northern Virginia and the sale of 80% of its interest in three Northern Virginia data centers to TPG Real Estate for $1.3 billion. The most active realtor in the digital domain wasn’t done, and also sold another 65% stake in two stabilized data centers in Chicago to GI Partners for $743 million. The company reaped another $475 million windfall by selling its interest in four Cyxtera data centers to Brookfield and an 80% interest in a build-to-suit data center in Northern Virginia to Realty Income.
Other big data center deals included the close of KDDI’s $1 billion acquisition of Allied Properties’ data center portfolio in Toronto, including Canada’s preeminent carrier hotel. Manulife Investment Management, on behalf of Manulife Infrastructure Fund II and its affiliates, acquired a controlling 70% interest in the global data center platform Serverfarm. Brookfield Infrastructure Partners, alongside existing investor Ontario Teachers’ Pension Plan, acquired Compass Data Centers for a reported $5.7 billion.
Looking ahead, 2024 likely holds more of the same, according to CBRE. The firm expects interest rates to ease by the end of the year and increasing investment appetite drawn by the large cash on hand and rising infrastructure requirements from distributed computing players and the artificial intelligence tidal wave, which shows no sign of cresting in 2024.
