As reliance on digital technology increases, investor demand for data centers rises

Investors are taking note with new entrants to the space while lack of product pushes the sector to emerging markets.

As our dependence on digital technology at work and at home continues to rise, there is a sector of the commercial real estate industry that is benefitting – data centers. According to Technavio’s latest market report, the data center market is estimated to grow by $615.96 billion from 2021 to 2026, which equates to a compounded annual growth rate of 21.98%.

This growth, 35% of which is located in North America, has caught the eyes of investors and lenders that have historically not been drawn to the space, which has resulted in a flurry of new entrants over the past year, including life companies and banks. JLL Capital Markets is currently in the market with multiple joint venture data center opportunities and remains very active in the data center debt placement assignments for new construction, transitional and stabilized assets.

“There are limited opportunities to play in the data center sector as the sheer number of transactions is relatively small compared to other assets classes,” said Carl Beardsley, Managing Director and National Data Centers Leader, JLL Capital Markets. “Data centers provide investors and lenders with an alternative asset class that is relatively unimpacted by economic uncertainty. End user demand continues to exceed supply, which has created a very competitive environment for space and power. We are fielding many inquiries from capital providers and investors to find ways to either initiate or increase their market share.”

Considered an alternative property type, the data center sector comprises only 1.3% of the overall commercial real estate industry, which equates to about 85 million square feet nationally. Despite market volatility, the data center industry is exceptionally competitive given the smaller pool of transactions to bid upon and the lack of product versus demand in the market. According to Real Capital Analytics, the sector has averaged $8.3 billion of volume annually over the last two years (2021 – 2022) compared to an average of $3.3 billion in the three-year time period prior (2018 – 2020) with a growth rate of 250%.

The M&A sector of data centers has been on an upward trajectory since 2015, with 2021 and 2022 volume 2.5x greater from a then record setting 2017.