For decades, listed real estate was a relatively bland asset class, but that’s changing for the better thanks to disruptive mega trends.
A prime example of that is the cloud computing and cybersecurity booms creating surging demand for data centers – the buildings that house massive servers and the like. In simple terms, Amazon Web Services (AWS), Microsoft’s Azure and the like need expensive equipment and lots of it to power the cloud. That gear needs to be stored somewhere and it’s in data centers.
Technologies ranging from 5G to cloud computing are creating massive demand for data centers. That’s a potential positive for clients. The bad news is that many of prosaic, low-cost real estate index funds and exchange traded funds used to get real estate exposure lack adequate allocations to the aforementioned. Back to the good news: More ETFs are addressing the “sexy” areas of real estate.
The Data Center Decision
Due to the struggles of growth stocks, including cloud names, this year, shares of data center real estate investment trusts (REITs) are sagging, too. Equinix (NASDAQ:EQIX), the most recognizable name in the space, is down 26% year-to-date.
That loss is comparable to those incurred by many pure play cloud equities, not the broader real estate sector and could signal the need for more investor clarity and education when it comes to data center REITs. After all, with the marquee name in the space acting as though it’s a tech stock, it’s not a stretch to say something may be amiss.
“Asking whether data center providers will ever supersede the largest companies in the world in terms of their ability to extract economic value from the cloud ecosystem is probably the wrong question,” opines Christopher Gannatti, WisdomTree global head of research. “Instead, it may make sense to think of the relationship between the current price and predicted future supply/demand balances. Data center infrastructure, in a broad sense, is a commodity, assuming that the providers can bring the cloud computing companies basically the same suite of capabilities.”
When it comes to data center investing, another area in need of clarification is the specter of prime customers, such as AWS, Microsoft and Alphabet, potentially building their data centers rather than leasing from landlords such as Equinix.
It’s a reasonable concern given the vast financial resources of those companies and others, but a company can’t simply flick a switch and build a data center in a few months. It’s costly, time-consuming endeavor.
“It is also the case that the customer base will likely evolve. Just as the hyperscalers might be thinking of ways to extract more economic value and take away the expense line item being paid to technological infrastructure providers, other companies are seeing big expenses being paid to the likes of Microsoft, Amazon, Google Cloud, etc.,” adds Gannatti.
Taking the Long View of Data Centers
It’s often said that clients are best served by taking a long-term view of financial markets, but that’s particularly true when it comes to data centers.
Megatrends, such as 5G and cloud computing, take years to unfold. History proves as much and that’s pertinent for data centers because the rise of 5G and cloud computing is creating exponential increases in demand for data storage. In other words, patience could be rewarded with data center investments.
“If investors are thinking of a different way to gain exposure to megatrends—their underlying infrastructure rather than the more direct players—the concept of ‘new economy’ real estate may offer something unique that could have a risk and return profile different than the more growth-oriented tech equities,” concludes Gannatti.