Contributor, Benzinga
December 5, 2023

Data centers are the backbone of technology and telecommunications and have been one of the fastest-growing sectors over the past decade. Data center real estate investment trusts (REITs) have been benefitting from this trend, especially as data traffic has increased tremendously since the pandemic era began. Though recent recession fears have caused high-growth tech stocks to take a back seat, the construction of data centers will likely continue unfazed, boosting the profit margins of data center REITs. 

What are Data Center REITs?

Data center REITs develop, acquire and operate data servers and networking equipment that store and regulate big data. Commercial real estate properties are equipped with uninterruptible power supply and heating, ventilation, and air conditioning (HVAC) systems to ensure smooth operations. Data centers also are surrounded by 24/7 security and are constantly monitored because of the sensitive data stored on servers. 

Benefits of Data REITs

Robust Demand 

data consumption is at all-time highs, as people spend a significant portion of their time online. Experts predict approximately 70% of the total global gross domestic product (GDP) to be digitized by the end of this year, with total data consumption amounting to 94 zettabytes. According to Future Market Insights, the global data center market is expected to grow at a compound annual growth rate (CAGR) of 7.5% over the next decade, which should benefit data center REITs.

Recession Proof

In this digital era, data consumption is recession-resistant. Amid wide-scale layoffs and unemployment, screen time and internet use might rise, as people have more free time on their hands to consume content. 

5G Adoption 

Thanks to faster speeds, users who have 5G connectivity consume roughly 2.7 times more mobile data compared to 4G users. As companies attempt to leverage the faster network to create smart cities and high-tech cars, data usage is expected to rise substantially in tandem with commercial 5G deployment, thereby increasing the need for data center REITs.  

Risks of Data Center REITs

High Competition

Numerous tech companies specialize in data center operations. Given the immense growth prospects, recession-proof business model and high profit margins, several REITs are branching out to acquire and manage data center properties. Competition is significant competition in this space, and REITs have to streamline their operations to boost efficiency and mitigate expenses to remain competitive. 

Expensive Operations

Data centers that store and transmit big data through their servers have intricate state-of-the-art cooling and HVAC systems to prevent overheating. They also require a stable and uninterruptible power source and regulated temperature to ensure optimal performance. REITs specializing in this sector often incur high operating, maintenance and management expenses. 

How to Invest in Data Center REITs

Publicly traded REITs list their shares on stock exchanges and can be traded during stock market hours through online stock brokers. Several exchange-traded funds and mutual funds also invest in data center REITs. 

Largest Data Center REITs

Digital Realty Trust

$141.40
0[0.00%]
Last update: 4:16PM (Delayed 15-Minutes)
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Vol / Avg.28.000 / 2.083MMkt Cap44.158B
Day Range- - -52 Wk Range86.330 - 154.180

Equinix

$775.97
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Last update: 4:20PM (Delayed 15-Minutes)
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Vol / Avg.19.000 / 582.978KMkt Cap73.423B
Day Range- - -52 Wk Range672.880 - 914.930

Data Center REIT ETFs

Data center REIT exchange-traded funds (ETFs) invest a majority of their funds in publicly-traded data center REITs. Investing in ETFs can help you diversify your portfolio with relatively lower capital investment. Some of the most prominent data center REIT ETFs are: 

  1. Global X Data Center REITs & Digital Infrastructure ETF (NASDAQ: VPN)
  2. Pacer Data & Infrastructure Real Estate ETF (NYSEARCA: SRVR)  
  3. iShares Cohen & Steers REIT ETF (BATS: ICF)

Industry Overview

Number of REITs2
Average Dividend Yield2.59%
YTD Total Return1.56%
October Total Return1.26%
2023Total Return-27.97%
Source: NAREIT

Quarterly Performance Data

Financial MetricQ3 20232023 YTD
FFO ($M)$1,044$3,038
NOI ($M)$1,880$1,880
Dividends Paid ($M)$725$2,129
Source: Nareit T-Tracker

Investing in Data Center REITs

Data center REITs are one of the fastest-growing sectors in commercial real estate. While the high-interest rates and tech slowdown have caused shares of publicly-traded data center REITs to slump, their financials and inorganic growth opportunities remain stalwart. 

Frequently Asked Questions

Q

Are data center REITs a good investment?

A

Yes, data center REITs are a good investment option.

 

Q

How do data center REITs do in a downturn?

A

Data center REITs are generally recession-proof. They have consistent dividend payouts, even during periods of economic downturn.