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
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Open138.530 | Close141.490 |
Vol / Avg.1.887M / 2.050M | Mkt Cap43.721B |
Day Range137.170 - 141.950 | 52 Wk Range86.330 - 154.180 |
Equinix
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Open743.600 | Close738.350 |
Vol / Avg.812.736K / 616.560K | Mkt Cap70.073B |
Day Range735.000 - 746.410 | 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:
- Global X Data Center REITs & Digital Infrastructure ETF (NASDAQ: VPN)
- Pacer Data & Infrastructure Real Estate ETF (NYSEARCA: SRVR)
- iShares Cohen & Steers REIT ETF (BATS: ICF)
Industry Overview
Number of REITs | 2 |
Average Dividend Yield | 2.59% |
YTD Total Return | 1.56% |
October Total Return | 1.26% |
2023Total Return | -27.97% |
Quarterly Performance Data
Financial Metric | Q3 2023 | 2023 YTD |
---|---|---|
FFO ($M) | $1,044 | $3,038 |
NOI ($M) | $1,880 | $1,880 |
Dividends Paid ($M) | $725 | $2,129 |
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
Are data center REITs a good investment?
Yes, data center REITs are a good investment option.
How do data center REITs do in a downturn?
Data center REITs are generally recession-proof. They have consistent dividend payouts, even during periods of economic downturn.