As they are no longer merely the domain of enterprise users, demand for data centers has skyrocketed in recent years with more information moving to the cloud. The pandemic has created issues, nevertheless the events of 2020 have largely accelerated this trend.
By just about every metric, the asset class saw incredible gains during the first half of the year, according to a report by JLL. Data center REITs outperformed other sectors, absorption rose in most markets and operators have thus far weathered the pandemic with steady—if not booming—business activity.
As strong as the overall industrial sector has been this year, data centers have been even stronger. For example, the stay-at-home orders brought on by COVID-19 led to an increase in online shopping, and thus renewed demand for warehouse and logistics space. This, in turn, has resulted in a year-over-year increase in returns of 2.3 percent among industrial REITs, according to information gleaned from Nareit.
Contrast that with data center REITs, which saw an incredible 19.2 percent climb over that same period. Residential, office, healthcare, retail and hospitality REITs all regressed during the 12-month period ending on June 30, 2020.
What’s behind this surge? First is the increase in online shopping; in addition to furthering demand of the storage of goods, extra server space is required to accommodate all the ones and zeroes supporting this activity. Additionally, remote working and learning have led to an uptick in videoconferencing and home-based internet use. Finally, with most movie theaters and other venues shuttered for the foreseeable future, virtually the only option available for most people to unwind is content streaming, which drives even more demand for data centers.
For Chicago, JLL predicts that data center demand is only going to accelerate during the second half of the year. The Chicago metro’s data center inventory currently stands at 563 megawatts (MW) across 4.7 million square feet of space. Of that, less than 35 MW are currently vacant.
While available supply decreased during H1 2020, CoreSite added 4MW of new capacity in June. The project was the first phase of their ground-up “CH2” data center, a 169,000-square-foot facility that will provide a total of 18 MW of capacity when completed. An additional 14 MW of data center supply is due to deliver in Chicago during the final months of 2020, from providers such as RagingWire, Stack Infrastructure, Stream Data Centers and Digital Crossroads.
One major change in the data center landscape is a shift from enterprise users occupying the majority of space to mounting demand from cloud companies. This trend is holding true in Chicago. Social media giant Facebook plans to construct an $800 million ground-up data center on 500 acres in DeKalb, Illinois. Elsewhere, a large cloud provider acquired 90 acres on two sites for large greenfield developments.
Data center absorption in the Chicago area was slow at the start of the year, but as COVID-19 delays tail off during the second half of 2020, JLL anticipates more activity, especially with certain providers bumping up against their maximum capacity as major leases close throughout the ensuing 12 months.
In fact, investors should expect that trend to drive the narrative nationally through the end of the year and into early 2021. Even as the pandemic spurred unprecedented demand during the first half of 2020, financial uncertainty put the brakes on many deals. As a result, there is a sizable backlog at the moment.
And as much of a gut-check as COVID-19 has been, it likely will further incentivize companies to migrate their data from private servers to public cloud providers. This movement has been gaining in momentum the last few years and the uncertainty of our current situation should push more companies in this direction.
Hosting and managing one’s own data provides businesses with unrivaled control and security. The tradeoffs, however, are relevancy and cost. IT infrastructure evolves at a nearly exponential rate; if corporations want to keep pace with this change, they have to heavily invest not only in new hardware, but training for employees. Cloud providers, however, can diffuse these costs across all the users of their services, allowing them to offer the latest and fastest technology at cheaper rates.
Whether or not the economy continues to lag for the next several quarters as a result of the pandemic, data centers appear to be one of the few truly recession-resistant real estate sectors. Bull market or bear—this asset class is in excellent shape regardless of what the near future holds.