Data Centers: A Unique Asset Class for Real Estate Investors
During this pandemic, investors have recognized that digital services are somewhat immune from even the most colossal economic crisis. Even as much of the global economy remains locked-down, online retailers, software providers, social media platforms and streaming services have seen demand surge like never before.
Powering these digital services are vast arrays of data centers spread across the world. Now, data centers have emerged as the preferred form of real estate for savvy investors and institutional money managers.
Perhaps the biggest publicly-listed real estate stock in the sector is Digital Realty (NYSE:DLR). The San Francisco-based firm owns 275 data centers spread across 20 countries. Last year, it generated $3 billion in revenue and $580 million in net income. This year, the stock is up 17.2% despite the downturn in the rest of the economy.
Digital Realty’s smaller peers have performed similarly well. Equinix Inc. (NASDAQ: EQIX), QTS Realty Trust (NYSE: QTS) and CyrusOne Inc (NYSE:CONE) are all up double-digit percentages year-to-date. They also offer dividend yields ranging from 1.5% to 3.2%.
Overall, the five major data center REITs in America are up 19.29% year-to-date, including dividends. With the amount of data consumed surging relentlessly across the world, these REITs could be expected to deliver steady returns for years ahead. The core business of the most successful technology companies, including Google, Amazon, Apple and Netflix, heavily rely on these data centers. Apple alone is expected to invest $10 billion in data centers by the year 2022, according to CNBC. The company currently spends well over $30 million a month to use data centers powered by Amazon Web Services.
However, Apple’s move to create its own data centers indicates a key risk for REITs like Digital Realty. If technology giants decide to invest in their own infrastructure rather than rent data centers from corporate landlords, data center REITs could face an insurmountable challenge to their business model.