This article is republished with permission from REITCafe.
Data center real estate investment trusts (REITs) have been the best-performing sector over the past two years, posting total returns of 28.36 percent in 2015 and 26.41 percent in 2016. Only the single-family home sector at 26.65 percent and the industrial sector at 30.72 percent achieved better returns last year. Once considered a fringe sector, data centers have charged onto the center stage as internet use and data consumption have skyrocketed. According to Cisco Systems, in 2016 the world used over a zettabyte of data—equivalent to the data taken up by 250 billion DVDs—and Cisco expects consumption to double by 2019.
The sector’s growth can also be attributed to the widespread transfer of data from corporate servers to the cloud. “Last year, the data center market saw big deals from major players, new economic and regulatory policy, and the wild card that is strategic cloud adoption,” JLL said in its 2017 Data Center Outlook report. “These factors are changing the rules of the game, from data center pricing models to location selection tactics—and everything in between.” The report also predicts that some leading cloud providers will triple infrastructure by 2020 to accommodate the mounting demand.
While the data center market is on the path to grow this year, some unknowns exist that might disrupt its success. Commercial Property Executive highlights some emerging issues, such as stricter data regulations. This is the case in Canada, where companies are mandated to store their data on Canadian soil, and in Russia, which is tightening its data sovereignty law. And despite a strong 2015 and 2016, data centers are also proving to be one of the sectors most sensitive to interest rates: returns stumbled late in 2016 before making a recovery in December.
Overall, the future for data center REITs appears bright. Despite some uncertainty in terms of regulations, President Trump’s proposed tax code might prove beneficial for data centers because encouragement of capital investment is expected to help the flow of funds into technology systems. Says Jon Meisel, JLL managing director and data center solutions market director, “User demand for smart data center solutions will only continue to heat up, with operators feeling the pressure to deliver more data, faster and more flexibly than ever.”
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.