The technology sector has seen major advances in technologies like the Internet of Things (IoT) and artificial intelligence (AI) over the last few years as pandemic-era efforts to advance automation capabilities come to fruition. Meanwhile, the Inflation Reduction Act has incentivized businesses to bring production back to the United States. Similarly, the CHIPS and Science Act incentivizes facilities that manufacture microchips and supporting technologies as the government attempts to bolster the U.S. technology supply chain.
These moves have been a boon for commercial real estate. Though the United States is playing catch-up in microchips and green energy, it has become the undisputed leader in data centers. The nation boasts almost 5,400 data centers as of March 2024. Germany took second place, trailing way behind with 521 data centers. Even with so many data centers in operation, U.S. developers seem just to be getting started.
Demand for Data Center Space Heats Up
Most new enterprise and consumer technologies exist in the cloud as the technology sector continues its shift toward subscription-based models over one-time license purchases. Meanwhile, many advanced manufacturing operations have given up their on-premises server farms in favor of off-site data storage and processing. As new technologies come to market and new facilities come online, demand for data centers continues to soar.
AI and machine learning will double the demand for data centers by 2030. The current boom for data centers is reminiscent of the pandemic-era warehouse boom when developers were so confident that they set records with speculative developments. While the warehouse market has rebalanced itself, 84% of data centers still get leased before they are built.
As demand for data centers continues to grow, the property type has drawn interest from investors frustrated with the volatility in traditional CRE markets like office space. As these investors seek to bolster their portfolios with more stable assets, prices will continue to climb upward—especially in primary markets.
The Appeal of Secondary Markets for Data Centers
The vacancy rate for data centers in primary markets in the U.S. hit a new record low in the first half of 2024 at 2.8%, according to data from CBRE. But if the pandemic-era rush on logistics properties during the pandemic taught us anything, it’s that tenants have other options beyond primary markets.
As warehouse developers and tenants sought alternative options in secondary markets a few years back, the same thing is happening now with data centers. The real challenge, however, is finding secondary markets that can handle the stringent siting requirements for this type of facility.
For example, large areas of the U.S. power grid simply can’t support the electricity needs of data centers and other high-tech industrial facilities. Similar issues exist with water access because data centers use millions of gallons of water for their cooling systems each year. For obvious reasons, access to high-speed broadband internet is also a must-have for any data center.
Finding a good data center location like this one in a secondary market is challenging but not impossible. Opportunities are available for those who know where to look.
Where Data Goes, Real Estate Grows
The world we live in is becoming increasingly digital. Since the technologies that drive digital transformation for businesses and consumers need data centers, the market has nowhere to go but up.
Affiliates of Phoenix Investors have a long and successful history of finding industrial sites with great potential for a second life. Our nationwide portfolio features numerous sites with access to sufficient electricity, water, and fiber optic networks for data centers. If you’re searching for an appropriate site for a data center, please contact us to see how we can help.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost-efficient solutions, and a reputation for success.
