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Why demand for data centers has REITs on cloud nine

     
data center

While REITs have underperformed for most of 2018 due to rising interest rates and investments moving to tech industry markets, their stock prices have been boosted by an increasing demand for data centers.

The US S&P 500 REIT Index has remained between the 270 to 290 range for much of this year- below 313.62 where it began the year. However, the REIT index has steadily rebounded back to 318 and is growing at a rate of 8.3%, outpacing the S&P 500’s 7.9% increase in the past three months.

REITs
Courtesy of JLL

Propelling the steady improvement has been a surge in data usage from e-commerce and video on demand and the rapid growth of cloud computing which is increasing the demand for data-centers.

To keep pace with the growth of data production, which is nearing 600 trillion gigabytes or 200% more traffic each year, experts estimate that the industry is going to have to build more than 4,000 new data center facilities.

Dave Crowley, Microsoft?s chief technical advisor, describes the trend as just the beginning of an ?s? curve of growth for the data center industry and sees the cloud services industry which has a potential market cap of more $4 trillion as a ?very real opportunity.?

The backbone of this large ecosystem is fiber-optic networks which are being deployed to improve bandwidth, network speeds, data transmission latency which will enable enterprises to deploy artificial intelligence, IoT and predictive analytics solutions and to meet needs of enterprise clients data centers are likely to continue to invest and make improvements in these technologies.

Cloud operators have continued to dominate leasing trends in major markets driving 25% of data center leasing in cities like Virginia, Chicago, and Dallas according to JLL?s 2017 data center outlook.

As more data center developers become REITs to increase access to low-cost capital the upward trend is likely to continue, especially because REITs offer significant advantages to stand alone operations.

REITs?must distribute 90% of their taxable income to shareholders in the form of dividends and can deduct dividends paid to shareholders taxable income- which makes them highly attractive and the fact that data center REITs are high yield and generally secured by long-term leases makes them more stable.

 

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