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Thursday, February 6, 2025

Data Centers: The New Gold Rush of Real Estate

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Data Centers: A Billion-Dollar Boom With Growing Pains

The United States is experiencing a data center boom, with over 2,800 facilities housing the servers that power the digital world. This surge in demand has transformed data centers into a lucrative real estate investment for tech giants like Amazon and Microsoft, who are pouring billions into expanding their infrastructure. But this rapid growth is also creating friction, raising concerns about the environmental impact, land use, and the long-term viability of these massive facilities.

The massive scale of data centers is attracting investors, fueled by the exponential growth in computing power needed for AI and other digital services. "The world’s top tech companies are pouring billions into building new data centers in the US," says Jordan Sadler, Senior Vice President of Public and Private Investor Relations at Digital Realty. "Amazon Web Services is investing an additional $35 billion, and Microsoft is reportedly planning to build a $100 billion data center facility."

However, the need for land and power is creating tensions. The Virginia suburbs, for instance, have become a hotbed for data centers, leading to rising land prices and concerns about the environmental cost. "The demand for land is directly tied to the demand for power," says Sadler. "And the value of the land goes up significantly if it’s in close proximity to utility power that has immediately available capacity."

Local communities are feeling the impact. While data centers generate significant tax revenue for counties, they also create pressure on infrastructure and raise concerns about potential environmental harm. "Residents felt like their voices were not being heard," says one local activist, reflecting the growing pushback against data centers. "They felt like some of the more contentious data center projects should have never been approved."

The debate highlights the complex relationship between technology and its physical footprint. While data centers enable the digital revolution, their impact on local communities, environment, and even the long-term sustainability of the industry itself is a growing concern.

Experts point to a range of issues. While some see data centers as a vital engine for future economic growth, others worry about their potential obsolescence as technology evolves. "If someone came in and said, ‘I’m going to build a data center and I’m just going to lease it to whoever needs a data center,’ that kind of raises a red flag to me about sustainability," says one expert.

However, Sadler remains optimistic, arguing that the rapid evolution of the tech world ensures a sustained need for data centers. "While you do see the leading edge customers, the largest technology companies in the world pushing the envelope, most customers by number are not evolving their technology needs quite as quickly," he says.

The future of data centers remains uncertain. While demand is high, managing the impact on local communities, addressing environmental concerns, and finding alternative uses for aging facilities will be crucial to ensure the long-term stability of this vital industry.

Data Centers: From Tech Hubs to Billion-Dollar Real Estate Investments

The United States is the epicenter of the global data center boom, housing over 2,800 facilities, far exceeding any other country. This surge in demand has transformed data centers from vital digital infrastructure to a lucrative real estate opportunity for investors, particularly in areas like northern Virginia, where the industry has exploded. While the world relies on these facilities to power everything from the internet to artificial intelligence (AI), the rapid growth has sparked controversy and raised questions about the environmental and social implications of this expanding industry.

Key Takeaways:

  • Demand for data centers is booming, fueled by the rise of AI and cloud computing.
  • Investment in data centers is skyrocketing, with major tech giants like Amazon Web Services (AWS) and Microsoft pouring billions into new facilities.
  • Data centers are becoming a prime real estate asset class, with land values soaring in strategic locations.
  • Communities are facing challenges and concerns regarding the impact of data centers on their environment, energy grids, and local tax bases.
  • The long-term viability of data centers is under debate, with questions about obsolescence and the potential for future demand shifts.

The Data Center Boom and the Rise of Real Estate Investments

The demand for data center space has exploded in recent years with the rapid growth of cloud computing, AI, and Internet of Things (IoT) technologies. These technologies rely on processing massive amounts of data, driving the need for more powerful data centers and increasing the value of land suitable for their construction.

"The world’s top tech companies are pouring billions into building new data centers in the US," said Jordan Sadler, Senior Vice President of Public and Private Investor Relations at Digital Realty. "Amazon Web Services is investing an additional $35 billion to establish multiple data center campuses in new locations across Virginia by 2040, and top AI competitor Microsoft is reportedly planning to build a $100 billion data center facility."

This surge in investment has transformed data centers into a highly attractive real estate asset class. "It’s interesting when we look at our global business today, not just within real estate, but across the entire firm, we see data centers as the most exciting asset class," said Sadler. The demand for data centers is being driven by a strong and growing need among Fortune 50 companies who are heavily reliant on digital infrastructure. However, this boom has also created a significant challenge for the industry: a shortage of suitable land and a growing public pushback.

The Land Rush: Data Centers and the Battle for Space

The need for land to build data centers has become increasingly contentious in states where hundreds of data centers already exist, such as Virginia. The influx of data centers has led to soaring land values and sparked controversy among local residents, who are concerned about the environmental and social impact of these facilities.

"I am Jordan Sadler, the senior vice president of public and private investor relations at Digital Realty," explained Sadler. "Our customers came to us and they said, you know, how much capacity do you have available in this market or that market or all markets, depending on the the customer? And this was an unusual request, and we had multiple requests of this sort in order to execute on all that demand, essentially to build all that capacity. We said, hey, let’s tap some additional capital."

The surge in demand has driven a dramatic increase in land values, particularly near power grids and other essential infrastructure. "The total value of commercial real estate property for data centers rose more than 60% last year in places like Loudoun County, Virginia, the data center capital of the world," said Sadler. This surge in value has brought both benefits and drawbacks to local communities.

The Local Impact: Benefits and Concerns

While the data center industry brings significant economic benefits to local communities in the form of increased tax revenue, job creation, and investment, it also raises concerns about environmental impact, energy consumption, and the potential disruption to local communities.

"We do see that land gets more value when it is on the appropriate power line for a data center’s need," said Sadler. "My experience in working with data centers is they do value that and they do, you know, come, come to the table aggressively in order to obtain that land. That means county tax revenues are considerably higher, both the taxes for the property and the equipment within the data centers."

This increased tax revenue can help local governments fund important infrastructure projects and services, benefiting residents in the surrounding areas. However, the construction and operation of data centers also create significant demands on local power grids. "Utility rates can come in and impact them in other negative ways," said Sadler. "Dominion energy has proposed rate hikes in several different states in 2024. They’ve dealt with unprecedented demand as of late, thanks to data center business."

The increased demand for electricity can lead to higher utility bills for residents and strain local power grids. There are also concerns about the visual impact of data centers, particularly when they are built near residential areas.

"It’s one of my concerns is where are we putting them? You know, are we putting them in areas that are residential areas? Are we putting them in land that’s industrial? Another consideration is, you know, how high can they go? Um, there are some hyperscale data centers. We’re looking at 110ft," said Sadler.

The size and scale of these facilities can be a major concern and are often the source of local opposition to development. Furthermore, residents worry about the potential for air and noise pollution from the facilities.

The growing pushback against data centers has led to increased scrutiny of the siting process and a growing need to address community concerns. Local governments are struggling to balance the economic benefits of data centers with the environmental and social concerns of their residents.

"Residents of Virginia’s Prince William County have made their concerns known," said Sadler. "There’s kind of a spectrum, and there’s a benefit to operating in the places where it’s tougher to build, because that typically means there’s less competition or less supply. One planned data center in Virginia’s Devlin Park garnered enough pushback that a Twitter account and a GoFundMe account were created to raise awareness about a potential project residents didn’t want built."

This opposition has led to a more stringent review process for new data center proposals. "We have a lot of people on the board who are inclined to really limit where we put data centers," said one county supervisor. "We cannot put them in in everywhere, and we also have a very strong, very vocal group of data center opponents who don’t want us to build any other data centers in the county, because they feel like we have more than our fair share."

Local governments are tasked with finding a balance between supporting economic development and addressing the concerns of their communities. However, some experts are cautioning about the long-term sustainability of the data center industry, raising questions about the potential for obsolescence and changes in future demand.

The Future of Data Centers: Sustainability and Uncertainties

The rapid evolution of technology raises questions about the long-term viability of current data center infrastructure. Some experts are concerned that these facilities may become obsolete relatively quickly, leading to a surplus of abandoned buildings.

"If someone came in and said, you know, I’m going to build a data center and I’m just going to lease it to whoever needs a data center, that kind of raises a red flag to me about sustainability," said one expert. "But Sadler feels like these buildings are not on a quick path to become obsolete, thanks to the digital transformations happening across industries."

Sadler believes that the rapid pace of innovation in fields like AI, cloud computing, and data analytics will continue to drive demand for data center space for years to come. However, the industry faces challenges in terms of meeting the ever-increasing demand for power and capacity.

"Don’t envy the utility companies right now," said Sadler. "They’ve got demand that’s, you know, in some cases five x what they’ve seen over the last 30 years. And they’re seeing that over the next five massive amounts of demand regulated in most cases. And so I do believe that that all adds up to some off grid solutions that may combine the utility source with the data center source in a single structured environment. And it won’t be just in the US. I think you’ll see that globally."

The industry is exploring innovative solutions to address the challenges of power consumption and future demand, including renewable energy options and sustainable design practices. However, the future of the data center industry remains uncertain, with potential changes in technology and demand that could reshape the landscape in the years to come.

The data center boom presents a complex array of opportunities and challenges for investors, communities, and the technology industry. Balancing the economic benefits of data centers with the environmental and social considerations requires careful planning, stakeholder engagement, and thoughtful solutions to ensure a sustainable future for this vital industry.

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Alex Kim
Alex Kim
Alex Kim is a financial analyst with expertise in evaluating and interpreting analyst ratings on various stocks.

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