By Christopher Cummings

Executive Director, Credit & Asset Management

In recent times, the digital landscape is dominated by headlines regarding the acquisition of data centers or the purchase of data center operators. When it’s not about acquisitions, the news often features announcements of new equity or joint venture arrangements. These joint ventures enable data center owners and operators to secure funding for future investments. These announcements are not for small change–the vast majority ascend into the range of multiple billions of dollars. That’s a significant investment for essentially a really, really large bag of (computer) chips.

Investment Trends in Data Centers

Investment trends in data centers across the U.S. have been notably dynamic, driven by the increasing demand for digital infrastructure to support cloud computing, artificial intelligence, and data analytics. Investors are focusing on regions with robust power grids and favorable regulatory environments, such as Northern Virginia, Dallas, and Phoenix, which have emerged as key hubs due to their strategic locations and existing infrastructure. The focus on sustainable growth is encouraging partnerships and joint ventures, allowing data center operators to leverage new technologies and financial resources to expand their portfolios strategically. Overall, the U.S. data center market is expected to continue its robust growth, fueled by technological advancements and the ever-increasing demand for data storage and processing capabilities.

The Driving Forces Behind Data Center Investments

We are now seeing the next phase in data evolution with a specific focus on artificial intelligence (AI) and the promise of efficiency, speed and decision making. Market activity over the past five years seems to signify an accelerating race to harness the largest market share of the data universe. According to an article by Data Center Dynamics, data center investment broke records in 2020 with more than USD 31 billion spent on mergers and acquisitions, which was more than double 2019’s investment. Activity in 2021 surpassed that record once again. Then in 2022 we witnessed an astonishing USD 48 billion in data center transactions, including the CyrusOne deal that was announced in the previous year.

Although 2023 and 2024 experienced a slowdown in activity due to previous consolidation trends, one transaction stands out for its magnitude: the acquisition of AirTrunk by Blackstone and CPPIB for USD 16.11 billion (AUD 24 billion). This deal surpasses the USD 15 billion acquisition of CyrusOne in 2021 by KKR and Global Infrastructure Partners.

Similarly, existing owner/operators are excelling on the investment front with multiple large joint ventures and equity infusions across the globe.

• Equinix recently announced a USD 15 billion joint venture with CPPIB and Singaporean investment firm GIC to build hyperscale data centers for service providers like Amazon Web Services, Microsoft and Google (to name a few).
• Blue Owl Capital Inc. entered into an agreement to purchase IPI Partners, LLC for USD 1 billion a seemingly small transaction in light of others referenced. But IPI has approximately USD 10.5 billion in assets under management spanning some 82 data centers with 2.2 gigawatts (GW)of leased capacity.
• Blackstone announced its intent to invest some GBP 10B in northern England to develop an enormous data center on the site of a previously planned electric vehicle plant.
• In June of this year, Vantage Data Centers announced it had raised some USD 11 billion over nine months that would feed roughly USD 30 billion in data center developments. The equity raise was led by DigitalBridge and Silver Lake.

Power and Infrastructure: The Backbone of Data Centers

With substantial capital investments and an insatiable demand for data, determining who controls the development of data centers is complex. However, the common denominator is power. Data centers have enormous power requirements, and statistics often reference data centers in terms of available computing power. Leases in data centers are typically measured in power units. Power is essential not only for IT equipment—such as networks, servers, and storage—but also for infrastructure components like cooling and power conditioning. Recent statistics show that cooling alone can consume up to 50% of a data center’s total power requirements.

According to Data Center Knowledge, smaller data centers consume between 1 and 5 megawatts (MW) of power, while a hyperscale data center can consume between 20 MW and 100 MW across physical footprints ranging from 100,000 SF to several million SF. To put this in context, 1 MW is enough to power approximately 800 single family homes (depending on source of power). So, a 100 MW hyperscale center requires 8,000 homes’ worth of power. If we consider the IPI portfolio mentioned above offering 2.2 GW of leased capacity (2,200 MW), that equates to roughly 1,760,000 homes. AI computing takes it to another level due to specialized chips that require more power and generate more heat. According to Cushman & Wakefield’s new Americas Data Center H1 2024 Update report, North America has reached an operational capacity of 18.5 GW, including 1.7 GW added during the first half of 2024.

Redundancy is another significant consideration. Since data centers manage cloud applications for virtually every popular computing format (think Microsoft 365) and provide all the horsepower behind search applications like Google and Bing, the energy sources need to be reliable. It’s not enough to simply plug into an outlet and assume the best. The best data center developments have multiple built-in redundancies and uptimes in excess of 99.8%, where both primary and backup power are crucial.

Challenges and Opportunities

Given the substantial power requirements of data centers, its crucial to consider the power grid capabilities when selecting a new site for development. This necessity explains why regions like Northern Virginia or Silicon Valley have become hotbeds for data center development. However, the rapid growth has led to challenges, including power availability backlogs in some areas, with delays extending over several years. There has also been pushback from residents in some prime spots that say “not in my backyard” to these behemoth data center facilities. Nonetheless, these challenges have created opportunities in new locations, such as Atlanta, Georgia, which offer available power and favorable zoning and land use regulations.

Another factor to consider is the pace of change in technology. New and more powerful chips are being developed at a torrid pace. Adopting advances in cooling techniques is a requirement to take full advantage of existing and future computing power. Data center developers must manage through, or into, these changes to ensure the least amount of obsolescence at their facilities.

Market Dynamics

Fortunately, vacancy rates in the most active data center markets are low—some even exceptionally so—while rental rates continue to rise due to supply and demand dynamics throughout the delivery chain. Demand consistently outstrips supply, a situation further intensified by the supply chain challenges experienced during the COVID-19 pandemic.

Upon completion and stabilization, many single borrower data centers are packaged together and securitized using an asset backed securitization (ABS) structure, collateralized by the cash flows from rents. As an example, Trimont was assigned as servicer and special servicer on our first data center deal in 2021, totaling approximately 600M in initial funding between USD and CAD, plus a funding provision for completion of construction of one of the data centers. Later in 2021 we were named on our second deal as servicer, special servicer and backup manager on an issuance totaling approximately 1.8B, primarily USD with some CAD. Both securitizations include US and Canadian assets.

Since that time, both deals have been “upsized” via bond refunding, or additional bond issuance under the original ABS master trust structure. Funding increases have been backed by improved asset values and/or the addition of more data centers to the collateral pool, reflecting a current combined UPB of roughly 4B in USD/CAD, or a 55.5% increase from initial issuance.

The Future of Data Centers in CRE

Ultimately, we must each evaluate whether investments in technology contribute positively to our quality of life. Many have experienced the benefits of technology, such as increased productivity or entertainment, while also encountering some frustrations. Nevertheless, the growth of our technological interactions largely depends on data center support. Owners, operators, and investors continue to expand their investments in this sector, signaling robust growth and a commitment to meeting the ever-increasing demand for data-driven solutions.

For now, the collection of computer chips continues to expand, offering more variants and an ever-increasing price tag, while our hunger for technology climbs in tandem. If science fiction books and film provide any indication of our path, we are in for an extraordinary adventure.

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Christopher Cummings, Executive Director on Trimont’s Credit and Asset Management team, has 30+ years in CRE beginning as a commercial real estate appraiser before shifting to the lending side. Chris has spent the last 17 years at Trimont where he has worked on balance sheet and securitized portfolios including CLOs, CMBS specially serviced loans and most recently in private placement bond transactions and asset backed securities (ABS).

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