“Should I Buy a Data Center?”: A 1st-Time Investor’s Guide | Commercial Real Estate Loans (2024)

FAQs

Is it smart to invest in data centers? ›

The return on investment (ROI) in data centers can be attractive, driven by the high demand for digital storage and services. Long-term leases with tenants provide a steady income stream, and the growing reliance on digital infrastructure suggests a sustainable demand.

1. Buy REITs (real estate investment trusts) REITs allow you to invest in real estate without the physical real estate. Often compared to mutual funds, they're companies that own commercial real estate such as office buildings, retail spaces, apartments and hotels.

Choosing a Property

The best investment property for beginners is generally a single-family dwelling or a condominium. Condos are low maintenance because the condo association takes care of external repairs, leaving you to worry about the interior.

Depending on your tolerance for risk, there could be some commercial real estate opportunities in 2021 and beyond. “The pandemic accelerated trends such as the hybrid work model and the rise of ecommerce, both of which we'll likely continue to see increase," said Dunn.

As with other niche property types, data center investing includes some unique risks, such as availability of power, supply chain delays, and natural disasters.

The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.

How much should I save for my first investment property? ›

The best way to ensure a return on your investment is to put 20% down along with enough money in reserves to pay for necessary repairs, maintenance and vacancies.

For those new to real estate, Real Estate Investment Trusts (REITs) offer a straightforward entry point. REITs are companies that own income-generating real estate and are known for paying out high dividends. They're an excellent way for beginners to gain exposure to real estate without owning physical properties.

The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.

The historical average estimate of the S&P 500 is 10%. Thus, a considerably “good” ROI on investments can be considered as 10% and above return cases. However, to gain a more in-depth insight into what makes up for a “good” ROI, understanding the factors that affect the property's ROI will be beneficial.

Overall, CRE maturities will rise to $929 billion in 2024, representing 20% of the $4.7 trillion in outstanding loans, with banks holding 47% of the maturing volume (Figure 2). The number of loans maturing this year has raised concerns about default risk and the potential for an increase in distressed assets.

As a commodity, data is mushrooming in size. In 2024 alone, the world is expected to generate 1.5 times the amount of digital data it did just two years ago (Exhibit 1). Demand for data centers has grown exponentially, too, with vacancy declining all over the world and at a decade-low in North America.

How do data centers make money? Operators of data centers may choose to lease out space or computing power to customers as a way to finance data center operations.

Meeting data center demand

As the data center market gears up for exponential growth, projected to soar from $25.8 billion in 2023 to an impressive $81.2 billion by 2030, the demands on the construction industry are monumental. In light of these demands, precision becomes paramount.

The sector has historically featured stable cash flows, long-term growth potential and has been relatively recession-proof as data centers have become essential to virtually all businesses.