Data Center Outlook
Outperforming other sectors amid the pandemic
According to NAREIT, data center REITs outperformed other sectors amid the pandemic in total returns, due to immediate demand for e-commerce and virtual connectivity. Operators with diverse tenancy have been able to deter significant direct COVID-19 impacts. Additionally, public cloud services accelerated demand in the first half of 2020. Eight of the 14 markets in the United States recorded an increase in net absorption.
JLL identified three key themes in the first half of 2020
1. Data center REITs show resilience amid COVID-19
COVID-19’s impact on public safety and stay-home orders led to significant immediate demand for digital connectivity. In addition to increased adoption of video conferencing and keeping employees connected, streaming services usage accelerated, keeping millions of people entertained inside the home. All this data activity relies on data centers with reliable infrastructure and redundancy.
Total YTD returns by sector, as of June 30, 2020
2. COVID-19 impact and outlook for operators and users
Operators’ revenue backlogs will fuel growth toward year-end and early 2021. Despite an immediate need for capacity, especially for cloud services, users and operators paused and delayed deals. Additionally, the pandemic nudges users toward the public cloud. Public clouds take over the management and maintenance components of data hosting and provide a flexible and scalable option for users.
3. Global expansions drive M&A activity
The confluence of rent compression and increased competition in the United States has pushed operators to expand in international markets to improve returns. Operators are pursuing greater returns and locating where hyperscale and enterprise users are expanding, which is in Western Europe.