Data Center real estate is riding the pandemic wave

In the discourse surrounding real estate asset classes, we seldom factor in data center real estate. However, unbeknownst to many, data center real estate has witnessed significant growth and expansion in the last couple of years, fueled by pandemic-induced digitalization. As mobility restrictions led to a surge in remote working, e-commerce, and internet usage, the need for data centers increased steadily, requiring more real estate space to accommodate them.

According to Savills⁽¹⁾, the total data center real estate space in India is expected to more than double by 2025. Currently, data centers occupy over 7.5 million sq. ft., which is set to increase by 15-18 million sq. ft. in the next four years. And the driving factors are many, including the imminence of 5G, and the increased adoption of IoT, AI, and cloud technologies.

Additionally, the long-term growth prospects of data center real estate are so bright that, despite a period marked by downturn across the real estate value chain, data centers were the highest-performing REIT verticals in 2020. Collectively, these trusts witnessed 21% growth, according to a source⁽²⁾. And to cater to the demand, organizations are expected to deploy large capital into data centers. These investments are likely to be channeled towards underserved data center markets like the Middle East and India, due to the emergence of data localization policies and favorable local conditions.

Policy tailwinds in growth markets

For India’s part, its network connectivity is among the best in the world, with 5G expected to launch soon. Also, the aggregate demand, coupled with a vast skilled workforce, makes India a hotspot for

data center expansion. But it is the policy framework that makes the most compelling case. If India’s strong data protection laws and open-market policies for digital-first businesses were not enough to solidify its data-center dominance in the Asia-Pacific, the data localization law — which necessitates businesses to near-shore the data centers — certainly will.

In the UAE, tech-centric policies, accompanied by the steady increase in IoT, AI, and cloud adoption, are fueling data center expansion. Dubai already leads the GCC market with a data center capacity of 60 megawatts per million people⁽³⁾. And many new data localization projects are underway, particularly ones helmed by cloud-based service providers looking to be closer to population centers. These companies are primarily driven by the opportunity to provide reliable services and reduce transit costs — which, in turn, spells opportunities for the regional real estate sector.

Implications for the real estate sector

Data centers not only consume substantial real estate space but also require build-to-suit units with reliable power input and connectivity. So, builders hoping to capitalize on the impending data center boom will have to provision for hyperscale accommodation. In addition to it, they can create product differentiation by sourcing power from renewables and by adopting environmentally responsible practices.

Justifying the slightly high initial investment is the higher returns that data center real estate can generate, in comparison to other real estate asset classes. Experts believe that this asset class will be less impacted by market volatilities than conventional ones like residential, hospitality, and CRE. Also, with digitalization showing no signs of cessation anytime soon, it is safe to expect sustained demand for data center real estate spaces for the foreseeable future. Therefore, property owners

are well-positioned to tie down occupiers for long-term contracts and premium rents. Furthermore, CRE owners who are facing churn due to increasing work-from-home policies and e-commerce can repurpose vacant office and retail spaces into data center real estate. This move could potentially turn a struggling asset class into a lucrative one.

It is interesting to note that it was a real estate-related company that signaled the imminent data center growth in the UAE. In 2016, Yardi, a property management software company, launched its data center in Dubai⁽⁴⁾, adding to its more than 10 centers across North America, Canada, Europe, Asia, and Australia. Yardi’s growing client portfolio in the Middle East prompted the move. Similarly, driven by digital transformation, more companies are expected to follow suit, soon.