Battle For AI Supremacy Has Created The Hottest Sector In Real Estate Investing

If you've been looking for a place to invest in real estate but the malaise of the office market is scaring you off and you don't believe there is much more upside in residential rents, the data center sector might be right for you. Since the emergence of Chat GPT and artificial intelligence (AI), companies around the world have invested heavily in maximizing the capabilities of this new technology.

Why Data Centers Are So Important

No matter where AI is running or what purpose it's being used for, there is one common thread. AI both consumes and stores data at such a high rate that it can't operate without massive data centers. Data centers are largely faceless and don't need expensive architectural enhancements like swimming pools, gleaming facades or designer kitchens.

That makes data centers the closest thing to perfect tenants most real estate investors can imagine. The only requirements data centers have to keep running is a robust heating ventilation and cooling (HVAC) system that keeps the computers and servers inside cool enough to operate at their maximum capacity and an adequate array of security measures, such as fencing and cameras, to keep out people who don't belong.

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Modern data centers occupy massive amounts of square footage and the companies or governments that need them tend to take out long-term leases, meaning data center investors can expect reliable returns for years into the future. That's not necessarily something people who own portfolios full of office or retail property can say right now. While office buildings are struggling to find tenants, developers can't build data centers fast enough.

The Drive To Develop AI Is Making Data Centers Even More Valuable

In an interview with MarketWatch, Jones Lang Lasalle Real Estate Vice President of Data Strategy Sean Farney summed up the sector by saying, "Everything is AI right now. The most immediate impact is this huge, new organic demand for hosting the tech that makes AI work."

Because AI focuses as much on actively learning as it does on data storage, it requires even more space than the data centers of just a few years ago.

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Farney is a man worth listening to. In 2009, he was instrumental in getting a 120-megawatt data center built for Microsoft in Chicago and he hailed the arrival of Chat GPT in 2022 as a "turning point" in the data center game. Since then, the race to build and acquire bigger and bigger data centers has been on. The good news for investors is that it won't stop anytime soon.

Companies Are Investing In Hyperscale Data Centers

With tech companies worldwide competing for the same resources, the supply of suitable data centers is vastly outstripped by demand. Meeting this demand is likely a primary motivator for the recently announced  $7 billion partnership between Blackstone Inc. and Digital Realty Trust to build massive, "hyperscale" data centers in Paris, France, Frankfurt, Germany and Northern Virginia.

The hyperscale data center, which can handle the demands of AI, is at the heart of the current data center gold rush. A group informally known as "hyperscalers" consists of well-funded Wall Street companies and tech titans who are pouring billions of dollars into the construction and acquisition of hyperscale data centers.  

Future Prospects Are Even Brighter

By some estimates, AI requires an estimated five to 10 times more power than traditional data centers. Since the current supply of hyperscale data centers is insufficient to meet current and future AI demands, the growth potential in this sector should remain strong well into the future. If you're an investor who wants to stay in real estate but get out of the office sector, data centers are worthy of consideration. 

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