PGIM Real Estate targets $2bn for data center fund

The US firm is aiming to hold a final close this summer for the globally focused vehicle, which would be its largest closed-end fund yet.

PGIM Real Estate, the real estate investment management arm of PGIM, the asset management business of insurer Prudential Financial, is in the market with a global data center fund, PERE has learned. The firm is looking to raise $2 billion in capital commitments and targeting a final close for the value-add PGIM Real Estate Global Data Center Fund in July, according to an investor document from the Boston Retirement System seen by PERE.

Should the fund reach its target size, it would be the largest closed-end fund ever raised by the firm, according to PERE data. PGIM Real Estate declined to comment on the matter.

The Madison, New Jersey-based manager has been investing in data centers since 2013 through a variety of fund vehicles. Last month, it announced a $600 million joint venture with digital infrastructure company Equinix to develop and operate a 28 MW data center in Silicon Valley, California. According to a press release, this deal was the firm’s first investment on behalf of its dedicated global data center strategy.

Speaking with PERE about the global opportunity set for data center investment, Morgan Laughlin, global head of data center investments at PGIM Real Estate, said developing new assets in the most established data center markets across North America, Asia-Pacific and Europe presents “the best opportunities to put money to work” in this sector.

“The least elasticity of new supply tends to be in the more developed, tier one markets where there’s less room for development and therefore you’re getting a greater upward movement in rent and in value for those data centers,” said Laughlin.

He explained the firm’s global data center investment strategy is focused primarily on new development and is operator independent, meaning the manager works with different operators in different markets via joint ventures.

“Our model allows us to look at dealflow coming from multiple sources, both from the relationships we have with the operators that are out there identifying land or taking land off their balance sheets, and from actively acquiring land ourselves and taking it to our operating partners for joint ventures,” he said.

Laughlin added he is seeing a lot of demand from operators for investment partners willing to take the risk alongside them in the development of new assets. The biggest demand for data centers still comes from traditional cloud service providers, he noted. However, the proliferation of AI applications following the launch of Chat GPT two years ago has driven up demand for data at such a rate that it has “caught the industry off guard.” As such, almost all the operators need incremental outside capital in order to meet the demands of their customer base, he said.

Suitable land supply in some tier one markets is a challenge, however. In Europe, for example, power supply constraints and regulation restricting development is driving data center investment away from the major ‘FLAP-D’ markets of Frankfurt, London, Amsterdam, Paris and Dublin and toward secondary markets such as Milan, Madrid and Warsaw. In March, for example, PERE reported US asset manager PIMCO had launched its first data center fund, targeting €750 million to develop and acquire data centers across Europe with a focus on these secondary markets.

While Laughlin acknowledged that developable sites in FLAP-D markets are hard to find, he said PGIM’s global strategy is to focus predominately on tier one markets. “The more secondary markets like the Berlins and Madrids and Milans are still an attractive opportunity, but the total return opportunity is not as strong as it would be in the primary markets because you don’t have that same level of imbalance between supply and demand,” he explained.

Capital markets interest

Despite development challenges in some markets, the projected growth of the data center sector is consistent across the globe. According to the 2024 Global Data Center Market Comparison published by Cushman & Wakefield, total data capacity in each major region is expected to at least double based on current development pipelines. Capacity is set to increase at a multiple of 2.5x in the Americas, 2.2x in Asia-Pacific and 2x in EMEA, the report shows.

“Data centers as an investment sector is front and center in most institutional investors’ minds and has already become a dominant piece of the alternatives space in terms of the amount of capital being directed toward it,” said Laughlin.

“I’ve had the opportunity to speak with close to 100 institutional investors about the data center sector, and I would say, broadly speaking, that 20 percent or less have an existing direct exposure to data centers. Out of those that don’t, 98 percent are actively trying to figure out how they’re going to get exposure.”

He acknowledged the fundraising market is “challenging,” as it is in private real estate overall – Q1 2024 was the lowest Q1 fundraising total for 12 years, per PERE data – but said data centers and debt strategies are the “two main areas where investors are actively seeking to increase their exposure from a real estate perspective.”

Asked whether data centers’ heavy power usage was a concern for prospective investors in the sector, Laughlin said most institutional investors are still in the process of determining a strategy for measuring and quantifying an acceptable ESG strategy in the data center space. “For example, you couldn’t invest in a data center using the same sustainability metric that you developed for office buildings or residential buildings or logistics, such as carbon utilization per square meter – it’s not an applicable measure for a data center,” he explained.

For those investors that have developed a data center-specific ESG policy, the focus is on power usage effectiveness, he said. The PUE ratio measures the energy efficiency of a data center, and can be used by the operator and asset owner to drive efficiency improvements at both the server and building level.

Laughlin added the data center sector is “treated a bit unfairly” in shouldering much of the blame for high carbon emissions within the built environment. Instead, the rapid digitization of our economies and societies is driving the demand for data, and the data center industry is just there to meet the insatiable consumer demand, he said. “The industry’s responsibility is to be as efficient as possible in meeting those needs.”