Lazard: Institutional appetite for data centers on the rise

As growth in data use continues, institutional investors in the private real estate markets are allocating an increasing amount of capital to the sector, says James Jacobs, head of real estate for Lazard’s private capital advisory group.

Institutional appetite from real estate investors to allocate capital to data centers increased in March. The imbalance between supply and demand for both corporates seeking space to store data, and institutions looking to invest should increase both earnings and capital values in the sector.

James Jacobs

The driving force behind the increase in tenant demand for data centers is the upsurge in data creation and storage. Data creation is rapidly expanding as our reliance on technology and automation grows. There has been a considerable increase in virtual communications, including messaging, social media usage and video streaming.

Additionally, artificial intelligence, automation, and machine learning all create information that require storage; in 2020, 40 percent of all new data was created by machines.

As data creation and handling has accelerated, companies are turning to cloud services rather than hosting data on-premises. In 2019, data center operator Element Critical estimated that by 2025, there would be an eight-fold increase in the number of companies opting to outsource data center needs as compared to those who would continue to self-host.

While demand for data storage increases, there are supply constraints. To attract top-tier tenants, operators require state-of-the-art facilities, suitable locations, and proven operating track records. Data centers need to be close to electricity grid connections and demand hubs, limiting the number of potential sites. This has led to an increase in occupancy – according to Cushman & Wakefield, the number of data center markets with less than 10 percent vacancy doubled between 2019 and 2021.

With the continued rise of data creation and storage volumes, coupled with a favorable supply and demand imbalance, institutional investors are likely to continue to be attracted to the sector.

This is not, however, a straightforward market.

There is a need for specialist expertise to identify suitable sites and manage development and operational risks.

Investors will also benefit from specialist advice on the impact of sustainability issues, such as the effect rapid expansion of assets could have on net zero targets, given their energy requirements.