Industrial Owners and Developers Look to Data Center Opportunities

Once again, when it comes to real estate, Amazon seems prescient, planning to spend more on data centers and less on warehouses.

“We expect [technology] infrastructure to represent a bit more than half of our total capital investments in 2022,” said CFO Brian Olsavsky during a recent earnings call. “We expect the fulfillment and transportation dollars spent on capital projects to be lower in 2022 versus the prior year.”

A new analysis from Avison Young principal and head of industrial capital markets Erik Foster suggests that Amazon’s increased interest in data centers, hardly recent even if reinvigorated, is about to get some company, as 5G and the digitization of apparently everything means all that data has to get processed and stored somewhere.

Another giant that has entered the space: Prologis, which partnered with Skybox Datacenters to develop data centers in major US markets. 

“Demand for data centers is also creating opportunities for industrial owners and investors, as some look to leverage their land holdings to tap into this lucrative sector,” Foster wrote. “Coming off an industrial building boom during the pandemic, some logistics investors are also looking to diversify and create a hedge against any downturns on the industrial & logistics side of their businesses.”

The e-commerce boom has slipped back to the growth of where it might have been if the pandemic hadn’t intervened, according to government data. A push for more warehouses could mean overbuilding—if the land was available and construction can happen fast enough given lingering supply chain issues in building and a labor shortage.

And if there are shifts, the “two sectors share similarities in their land allocations and requirements, access to power, security, zoning and tenant profiles, and both have benefited significantly during the pandemic,” Foster said. And other trends, like work from home, still need more data processing even if the rush online orders for daily commodities have slowed.

Some big markets are Northern Virginia, Silicon Valley, Chicago, New York, and Dallas. All big business locations. Data center construction was supposedly up 29.2% year over year in the first quarter of 2022. “Among the large scale projects is Meta’s $1.6 billion investment in two centers in Texas and Missouri,” Foster wrote. “These pushed the company’s total U.S. investment in data centers to more than $16 billion. The company has more than 20 facilities worldwide.”

Some of the logistics heavyweights getting involved are Prologis and LOGOS, both working with partners that understand the data center business.

But according to some sources GlobeSt.com has spoken to over the past year, data centers get more complicated the closer you look. If there’s a metro area that understands the type of construction and operation, that’s great. But many areas don’t have data centers defined in their building codes, which can make entitlement a challenge. Putting such facilities into a central business district is a challenge because they don’t have a lot of employees and so lack the economic synergy cities generally want.

Plus, data centers don’t have a long life, at least for the giants. “Data centers become obsolete in five years or so,” Michael Silver, chairman and managing broker of Vestian Group, told GlobeSt.com in January. “More and more businesses are outsourcing their data centers to the cloud. You have to evaluate the cost to redo it to accommodate. Number two, the hyper scalers like [Amazon, Google, or Microsoft] go in and take two-to-three-year leases with extensions. It’s good for them but it’s hard to get financed.”

And then there are the ESG considerations. “They’re not exactly environmentally healthy,” Silver said. “There’s a lot of carbon, a lot of electricity.” Such things aren’t attractive on a warming planet.