Back to the Future: AI Tech Powers Data Storage Centers in REIT Investment Space
REIT investors are forgoing office and retail to buy into two powerful data storage REITs
By Brian Pascus June 30, 2023 4:14 pm
reprints
If artificial intelligence is the hot topic of the present, then data storage centers might be their road to the future.
A new report from CenterSquare Investment Management, a Philadelphia-based real estate investment firm, found that two data center companies within the real estate investment trust (REIT) space are outperforming office and retail on investments. The report also found that the expected utilization increase of artificial intelligence (AI) across the economy will create more demand for the two REITs, which already control market share of the cloud connection technology used by the largest firms in the tech space such as Amazon (AMZN) Web Services, Google (GOOGL) and Oracle.
Equinix (EQIX) and Digital Realty Trust (DLR) together account for all REIT data center storage investment in the United States, according to CenterSquare.
While an average REIT — which are companies modeled off mutual funds that own, operate and finance income-producing real estate for investors — would own a property and hire a property manager to handle the space, the data center REIT space is operationally intensive. Equinix and Digital Realty Trust develop, acquire and lease computing space to tenants and have eliminated competition among other REITs. Equinix has an estimated value of $80 billion, while Digital Realty Trust has an estimated value of $50 billion.
The two companies “have a massive employment base that operates all the data centers to ensure functioning and redundancy and that nothing goes offline,” explained Uma Moriarity, senior investment strategist at CenterSquare. “Through privatization and mergers and acquisitions, these are the only two left standing. Other data center REITs exist globally, but these are the only two in the U.S.”
Data storage centers are arguably the critical factor of the mid-21st century U.S. economy. They house all of the computing power that requires the digitalization across the economy, from transmitting data and utilizing computing power to cloud software and running AI applications. As their importance has grown, so too has their market share.
Data centers make up 8.6 percent of the investible REIT universe, according to CenterSquare data from the FTSE NAREIT All Equity REITs Index, a national index of 144 REITs that carries a market capitalization of $1.1 trillion. That 8.3 percent share of the two data storage REITs triples the investable NAREIT ratios of office (2.9 percent), and exceeds hotels (3.1 percent), self-storage (7.6 percent) and retail (7.8 percent).
“There’s lots of surprise by how traditional commercial real estate sectors like office and retail are a really small part of the investable REIT universe,” Moriarity admitted. “They’ve been replaced over the last 15 years by a lot of niche sectors, and data centers are one of them.”
Moreover, data centers are poised to see incremental demand due to the development of AI, with the annual rental revenue from cloud and IT providers like Amazon Web Services (AWS), Oracle, Microsoft (MSFT), Apple (AAPL), Google, IBM and Meta Platforms expected to exponentially increase in the years ahead, according to CenterSquare.
“On the demand side, cloud deployment is one of the big factors, not just for tech companies, but it’s happening across government and industry more broadly,” Moriarity explained. “And AI requires so much more computing power. You’re going to see a step change in the demand required for computing power for artificial intelligence compared to the amount of computing power required for pre-AI, in terms of the applications.”
Underscoring this assessment, Digital Realty Trust and Equinix already receive annualized rental revenues of 50 percent and 35 percent, respectively, from cloud and IT providers, compared to other data storage tenants, according to CenterSquare.
“The phenomenon in the data center space is that you’re always innovating,” said Moriarity. “Data Center REITs have had to continue to produce new products to support new computing technology. You have to churn and always be growing.”
These two monolithic data center REITs already hold market share within AWS, Google Cloud, Azure and Oracle for the cloud computing technology known as “on ramp” or “ramp nodes.” This “on ramp” technology is the critical infrastructure allowing customers of AWS and Oracle and others to use their platforms and gain access to their cloud’s wider network.
As Moritarty explained, if a customer is using AWS to run an application on the cloud and is trying to figure out how to deploy that service in Northern Virginia or Phoenix, they’ll need to go onto AWS’s website and figure out how to get connected to the cloud in those particular markets. Due to their hold on market share, Equinix and Digital Realty Trust will be the chosen partners to assist customers there.
“A majority of the time those data center connections will be coming through those two REITs,” Moriarity said. “Amazon, Oracle, they are using the data centers of the [two] REITs.”
Brian Pascus can be reached at bpascus@commercialobserver.com
