Harrison Street forms $1bn JV to build data center campuses

Teaming up with American Real Estate Partners, the Chicago-based firm is betting that multi-building properties are the future for the niche property type.

Two managers are staking a big bet that standalone data centers will not be enough to meet the needs of tomorrow’s biggest occupiers.

Chicago-based Harrison Street Real Estate Capital and Virginia-based American Real Estate Partners have committed $1 billion to a joint venture to build multi-building data center campuses in Northern Virginia, PERE has learned.

The joint venture has already acquired two development sites, on which it will develop six centers spanning 2.1 million square feet. Specifically, Harrison Street and AREP will develop “powered shells” – empty facilities that provide space and power capacity to hyperscale cloud storage providers, such as Amazon Web Services, Microsoft Azure and Google GCP, for them to house servers and other hardware.

“A very substantial portion of the growth that we’ve seen [in the data center sector] over the last several years, and expect to continue seeing in the coming years, is coming from the hyperscalers, which are the very largest technology companies that are deploying a cloud compute product for customers and end users,” Michael Hochanadel, managing director and head of digital real estate at Harrison Street, tells PERE.

Harrison Street is investing in the joint venture using its flagship opportunistic fund series and its open-end Social Infrastructure fund, Hochandel said. AREP is drawing from its Strategic Opportunity Fund III, which launched last year.

Both locations acquired by the JV are in Northern Virginia’s Loudoun County, which has earned the nickname ‘Data Center Alley’ because of the concentration of facilities there. The region has an inventory of roughly 31 million square feet and a planned pipeline of an additional 51.5 million square feet, according to an H1 2021 report from brokerage JLL. The next closest market in size is Northern California, with 6.3 million square feet.

Despite the depth of the data center pool in Northern Virginia, the market lacks facilities that possess the size and energy capacity to meet the needs of today’s biggest tenants, Doug Fleit, AREP’s chief executive, tells PERE.

“There were very few operators that were operating at scale and none of them were operating on a powered shell delivery basis,” Fleit says. “We saw the need to deliver that scale to hyperscalers in Ashburn. We see that need is very real and something that will create a long-term program for our investment program.”

Many of the properties in the market were designed and built a decade ago, Fleit says, when operators needed less power than today’s hyperscale tenants. Addressing that energy shortfall retroactively is more difficult for one-off assets than campuses, he added. For example, a utility provider would be more likely to construct an electrical substation to serve a collection of data centers, rather one for one.

“There are only so many large land sites left that can accommodate substations on site,” Fleit says. “So, sites that can accommodate substations are much more valued by hyperscalers.”

Hochanadel said there are also advantages to building multiple data centers on the same site from a network architecture perspective. This provides added an opportunity to link servers within different buildings and ultimately increase security.

“Effectively, those are able to operate as one node within the underlying hyperscaler’s broader network,” he says of campuses, adding that operators already do this informally by congregating in just a handful of markets.

Data demand

Data centers are quickly becoming a must-have property type for institutional developers. The sector was one of the few parts of the built environment that flourished during the early stages of the pandemic and saw its usage rate increase during lockdown periods.

Harrison Street, which specializes in niche real estate tied to demographic trends, has been active in the sector since 2018, deploying $2.4 billion into data centers and other related infrastructure, such as rentable fiber optic lines. Hochanadel was hired a year and a half ago from JLL, where he was senior managing director, to lead Harrison Street’s expansion into digital real estate.

“We’ve always invested in asset classes that are operationally intensive, somewhat non-cyclical and defensive in nature, and ultimately, categories that are supported by the exceptionally strong underlying demand fundamentals,” he says. “Over time, there was fairly broad recognition that data centers fit that category as well.”

AREP, which invested in office and multifamily before shifting its focus to data centers, entered the space in 2015 by buying a campus in Northern Virginia from Verizon Wireless.

Before forming a joint venture, the two managers acquired another property in Northern Virginia, and are in the process of demolishing existing buildings to replace them with a data center campus. They expect all three sites to be completed within the next two to three years.