Data Centers Are Building Upward To Satisfy Demand … Could This Be A Lifeline For Commercial Real Estate?

The emergence of data centers as essential big-tech infrastructure pieces has also impacted the real estate industry. Up to now, most data centers have had a similar profile: large low to mid-rise buildings with a massive footprint in terms of total square footage. That is beginning to change, and data centers are increasingly going multistory. Here's how that change could be a lifeline for the office sector.

Many older data centers were built before the emergence of AI, which depends on access to massive quantities of data to be effective. They were also predominantly built in out-of-the-way areas with inexpensive real estate. Those two facts explain the Spartan aesthetic of older data centers and why they tend to cover so much real estate. However, Big Tech’s current and future data demand forces data center operators to adapt.

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Since going mainstream, data centers are being built in suburbs and exurbs of major metropolitan areas where land is more expensive. These newer data centers are also popping up in markets where massive one-story windowless data centers behind a barbed wire fence won't fit in with the rest of the area. That's why the future data center is increasingly taking the form of multistory buildings resembling office towers.

Steven Donohoe, the senior vice president of global data center design for data center REIT Equinix, explained the new trend to the Wall Street Journal by saying, "Data-center footprints are continuing to expand, and if you can't go outward, sometimes you have to go upward." Equinix has data centers as tall as 10 stories in many U.S. markets and a 12-story tower in Amsterdam.

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Building upward offers other advantages to data center operators. Chief among them is maximizing return on investment by renting more space to data-hungry AI operations. Additional expenses come with building higher, such as extra plumbing and electrical work, but the multistory data center is here to stay. That reality is already affecting land prices in prime data center markets.

Andy Cvengros, managing director of JLL's U.S. data center markets group, notes that land prices have tripled in Chicago's suburbs in just the last three years. Remember, that's just the cost to buy and build the center. Paying for the power necessary to run it is another expense. Cvengros told the Wall Street Journal, "You've got to go vertical to make sense of those numbers."

This is where there could be a window of opportunity for some of America's troubled commercial real estate. Some multistory office towers in suburban markets that are also struggling for tenants could theoretically be converted into data centers. This won't be possible in every case, but an article in Forbes notes that ample suburban office space in major markets could be suitable candidates for conversion.

Despite the Fed's recent rate cut, many office properties remain stagnant as distressed or underperforming assets in commercial portfolios. If even a small percentage can be converted into multistory data centers, office REITs and the banks holding their loans could cut their losses by tens of millions of dollars. 

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