An Emirati billionaire pledged Tuesday to invest upwards of $20 billion to build data centers in the US.
The soaring demand for data centers, fueled by the AI craze and the explosion of cloud-based services, has sparked a boom in infrastructure dealmaking.
GPs and institutional investors see long-term data center projects as a relatively safe way to capitalize on the AI revolution. Compared to investments in individual AI-focused companies, large infrastructure projects, such as those required for data center development, reward investors with contractual cash flow from a suite of high-quality tenants.
In 2024, digital infrastructure GPs struck a record-breaking $108.1 billion in deals for data centers and related markets—over three times as much money as they spent in the previous year, according to PitchBook data.
To some, this market holds greater appeal than traditional real estate or infrastructure investments.
“In some ways, it’s like selling shovels to people looking for gold,” said Jon Mauck, senior managing director and global head of data center investment strategy at DigitalBridge, one of the largest investors in this space.
The high demand for data centers, fueled by tech giants and AI startups competing for access to prime locations, allows builders and operators to command premium rents and secure long-term leases with ease.
“I don’t know who is going to find gold or be the largest AI platform, but whoever is doing anything in that world needs an environment, i.e. a data center, to deploy it,” he added.
For example, with a price tag of $16 billion, Blackstone’s takeover of AirTrunk in 2024—an operator of hyperscale data centers in Asia Pacific—marks the largest PE deal in this market ever, PitchBook data shows.
Investor enthusiasm and interest in data centers has also seeped into adjacent industries. In October, KKR and Energy Capital Partners announced a $50 billion partnership to accelerate the development of data centers, power-generation projects, and transmission infrastructure.
Scrambling for access
The imbalance between supply and demand has led to developers often pre-leasing a major share of new data center capacity with prospective tenants before construction begins.
In addition, developers have been known to lease out capacity before sealing the legal contracts to secure land and power.
“People are in that sort of panicked mindset to get access,” said David Hirsch, a principal at General Capital, a San Francisco-based investment firm in sustainable infrastructure.
By the first half of 2024, a combined 3,872 megawatts of new data center capacity was under construction across the eight largest US markets, according to real estate consulting firm CBRE.
Nearly 80% of that capacity was pre-leased, largely driven by cloud providers; AI providers also represented a considerable amount of the demand, CBRE found. Additionally, the vacancy rate for completed data centers dropped to a record low of 2.8% during that period.
“The demand and supply fundamentals will be solid for a long time, given the exponential growth of data and the lack of capacity to store and process the data,” said managing director Casey Miller of Principal Asset Management.
Compelling return profile
The intense demand for data centers translates into attractive payouts for investments in this market, which range from high-single-digit IRRs to those in double digits, depending on the risks investors are willing to take.
The market also offers steady cash flow ensured by high-quality tenants such as large tech companies with investment-grade credit ratings, like Microsoft, Amazon, Google and Oracle, industry participants said.
These customers typically lock in long-term leases, as the costs and inherent business risk of migrating from one data center to another are high.
The average lease term for data centers ranges from five to 20 years, and hyperscalers typically commit to 10- to 15-year leases.
Given its long-term investment horizon and attractive returns, the world’s largest LPs are keen to invest in data center infrastructure.
The ones awash in cash are pursuing direct investments, while others participate through private investment funds.
The Canada Pension Plan Investment Board is one of the most prominent direct investors in the burgeoning market. Last year, it teamed up with Singapore sovereign wealth fund GIC and data center developer Equinix to form a joint venture that will invest over $15 billion in data center development in the US. It also backed a 1 trillion won (about $686 million) project in November to develop data centers in South Korea.
“LPs are seeing the growing demand and the lack of supply of data centers for the emergence of AI and other important uses, so they understand the importance of that,” said Adam Toczylowski, a managing principal at Meketa.
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