The proposed site of Meta Platforms Inc.’s data center outside Talavera de la Reina, Spain, in July 2023.
Paul Hanna | Bloomberg | Getty Images
According to Citi, real estate companies around the world are now turning their attention to one area: data centers.
“One of the emerging themes emerging across the real estate industry globally is the move by industrial and diversified companies into data centres,” Citi said.
“The potential increased profit margins from data center development have attracted strong interest from real estate companies around the world who are interested in exploring and expanding data center locations,” the bank added in its June 17 note.
Citi noted that the push into data centers is being driven by key themes such as artificial intelligence and near-shoring.
Data centers house the vast computing power required for AI workloads, and the need is growing as many technology companies rapidly develop their artificial intelligence infrastructure. Large language models require large amounts of data center capacity.
Citi noted that more industrial companies are considering converting warehouses into data centers, but the bank said it believes that hyperscale data centers that serve AI requirements require large amounts of electricity, and limited grid capacity is “constraining” supply growth.
“As a result, we expect demand to match or exceed supply over the next few years, which will contribute to improving the data center sector’s key performance indicators (KPIs) and development revenues,” Citi said.
“We expect the development and construction of hyperscale data centers to increase significantly over the next seven years, attracting interest from a variety of industries and diversified companies around the world,” it said, predicting that data center electricity demand will expand at a mid-teens compound annual growth rate through 2030.
“We wouldn’t be surprised to see some industrial companies partner more directly with existing data center providers and platforms, leveraging their supply chains and redeveloping warehouses and shells into hyperscale data center markets, creating a win-win situation,” he added.
Stocks that will benefit
The bank named three U.S.-listed real estate investment trusts as “direct beneficiaries” of growing demand for data centers. Digital Realty Trusta data center company Equinix Listed in Australia Next DC.
Digital Realty said half of its first-quarter bookings were “likely to be related in some way to AI workloads,” and about half of its sales pipeline is also due to expected AI workloads, according to Citi.
“We believe Digital Realty’s data center bookings will continue to trend upwards and have the potential to exceed our guidance, given our top-down industry outlook and the share DLR will be able to capture,” the company added. “Digital Realty has the opportunity to capture strong bookings and favorable pricing that will lead to improved returns on capital.”
As for Equinix, Citi said the company provides a “valuable hub” for customers to connect to a variety of cloud and generative AI services. Nvidia’s derivative products are also located here, and Equinix offers “fully managed services for Nvidia AI,” Citi said.
“Growth prospects appear to be undervalued at current prices,” the bank said.
Other “diversified” beneficiaries include Singapore-listed companies, including those converting warehousing assets. Keppel DC REITand Maple Tree Industrial Trustand CapitaLand India TrustAccording to the City.
