Proposed location of Meta Platforms Inc.'s data center. Outside Talavera de la Reina, Spain, in July 2023.
Paul Hanna | Bloomberg | Getty Images
Real estate companies around the world are eyeing one area at the moment: data centers, according to Citi.
“One compelling emerging theme globally in the real estate sector is the expansion of industrial and diversified companies into data centres,” Citi said.
“The high potential returns from data center development are creating strong interest from real estate companies around the world to explore and expand their data centers,” the bank added in a June 17 note.
Citi pointed out that the trend towards data centers is driven by key topics such as artificial intelligence and near transportation.
Data centers contain massive amounts of computing power needed for AI workloads, and this need is expected to grow as many technology companies rapidly develop AI infrastructure. Large language models require large data center capacity.
Siti noted that more industrial companies are looking to convert warehouses into data centers. But the bank says it believes the large power requirements of large-scale data centers – those dedicated to AI requirements – and the limited availability of power transmission, are “holding back” supply growth.
“As a result, we expect demand to match or exceed supply over the next few years, contributing to improved key performance indicators and development returns for the data center category,” Citi said.
“We expect the development and construction of large-scale data center capacity to grow significantly over the next seven years, increasing interest from a variety of global industrial and diversified players,” she said, anticipating that demand for data center capacity in the park will expand. Annual growth rate in the mid-teens until 2030.
“We would also not be surprised if some industrial companies partner directly with existing data center providers and platforms to leverage their supply chain and create a win-win to redevelop warehouses and enter the large-scale data center market,” she added.
Stocks to take advantage of
The bank named three “direct beneficiaries” of the surge in demand for data centres: a US-listed real estate investment trust Digital real estate trustdata center company Equinix and Australia included NextDC.
Digital Realty noted that half of its bookings in the first quarter “were likely related to AI workloads in some way,” and about half of its sales pipeline also comes from projected AI workloads, according to Citi.
“We believe Digital Realty's data center bookings are likely to maintain an upward bias and could exceed our expectations based on top-to-bottom industry forecasts and considering the share DLR can take,” she added. “Digital Realty has the opportunity to have strong bookings and favorable rates that can deliver better returns on capital.”
As for Equinix, Citi says it provides a “valuable hub” for customers that connect to a range of cloud and generative AI services. There's also an Nvidia derivative play here, with Equinix offering a “fully managed service for Nvidia AI,” Citi said.
“We believe that growth prospects are underappreciated at the current price,” the bank said.
Other “diversified” beneficiaries – including those transferring their warehouse assets – include Singapore-based DC Rate cableAnd Mapletree Industrial TrustAnd CapitaLand India TrustAccording to Citi.
