AI fuels America's hottest real estate--data centers

The hottest commercial real estate in the U.S. today isn't hotels or office towers, but power-hungry data centers, typically located in places like Northern Virginia, Columbus, Ohio, and Salt Lake City, Utah.

"It's all about AI now," Sean Farney, vice president of data center strategy at real estate firm Jones Lang LaSalle, was quoted as saying. "The immediate impact is a huge new demand for the support and hosting of AI technology."

He believes ChatGPT's release in late 2022 marked a turning point for the industry. While it prompted companies like Microsoft, Google, Meta, and others to launch their own AI products faster, it also fueled a gold rush in commercial real estate, which had been sluggish, especially in office buildings.

Not building fast enough

In recent years, companies have been scrambling to lease data center space in major markets like Northern Virginia, and demand has even spread to secondary and emerging markets like central Ohio.Amazon.com Inc. is developing a $7.8 billion project in central Ohio.

Since the rise of telecommuting in 2020, a lot of money has poured into data centers, communications infrastructure, fiber optics, cellular towers, and related technology support, according to Patrick Wilson, a manager at CenterSquare Investment Management. Money is flowing into this vertical far more than any other commercial real estate sector.

According to Farney, much of the money is coming from deep-pocketed "mega-corporations," which include the Wall Street "Tech Seven" and Oracle, among others. These large tech companies are building their own data centers worldwide at a compound annual growth rate of 20 to 30 percent. They can be seen spending as much as $1 billion on new facilities.

In total, Jones Lang LaSalle tracks more than 5.3 gigawatts of data center capacity under construction in North America, equivalent to "the energy needs of every home in the San Francisco metropolitan area for a year."

However, given that power and land constraints have become major hurdles for the industry, growth in data centers won't happen overnight. A recent example is Google's planned $200 million data center in Santiago, Chile. Construction has yet to begin, but the permits were partially revoked this week by an environmental court. The court required Google to amend its application to take into account the impacts of climate change, particularly on the capital's water supply.

More offices could be converted to data centers in the future, given the amount of underutilized space in suburban and urban central business districts that can add additional capacity for data centers, according to Moody's senior economist Ermengarde Jabir. Data Centers Are Becoming AI Factories

Tech giants are among the major owners of U.S. data centers, but they're not the only ones.Their demand is so great that they rent space from other companies.

Digital Realty Trust, Equinix and other real estate investment trusts have been major players in the industry for years.These existing players needed to find ways to compete in the AI gold rush while also dealing with older data center assets that were at risk of becoming obsolete.

But in recent years, as global demand surged, infrastructure funds, including funds from Brookfield Infrastructure Partners and Blackstone, have jumped on the bandwagon, making a series of big investments in data centers.

"We believe that AI takes a decade or more to build, and that global data center capacity, which is currently 50 gigawatts, will double to 100 gigawatts in the next six to 10 years," Marc Ganzi, chief executive of DigitalBridge Group, said on an earnings call in February.

"We believe that data centers are becoming the AI factories, where data is the input and intelligence and insights are the output," Ganzi said.