The proposed site of the Meta Platforms Inc. 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 right now: data centers, according to Citi.
“One of the compelling emerging themes globally across Real Estate is the expansion of industrial and diversified companies into datacenters,” said Citi.
“The higher potential returns from data center development is creating strong interest from real estate companies across the globe exploring and expanding their datacenter footprints,” the bank added in a June 17 note.
Citi noted the push toward data centers is being driven by major themes such as artificial intelligence and nearshoring.
Data centers house vast amounts of computing power needed for AI workloads, and that need is set to grow as many tech companies are rapidly developing infrastructure for artificial intelligence. Large language models require a lot of data center capacity.
More industrial companies are looking to convert warehouses into data centers, Citi noted. But the bank says it believes that the large power requirements for hyperscale data centers — those made for AI requirements — and the limited availability of power transmission, are “restraining” supply growth.
“As a result, we expect demand to keep pace or outpace supply over the next few years, contributing to better KPIs and development returns for the data center category,” Citi said.
“We predict development and construction of hyper-scale data center capacity will grow meaningfully over the next 7 years, fueling interest from a variety of global industrial and diversified players,” it said, forecasting that demand for data center power will expand at a compound annual growth rate in the mid-teens till 2030.
“We would also not be surprised if some of the industrial firms were to more directly partner with existing data center providers and platforms to tap into their supply chain and create a win-win to redevelop warehouse and shell into the hyper-scale data center market,” it added.
Stocks to benefit
The bank named three “direct beneficiaries” of rising data center demand: U.S.- listed real estate investment trust Digital Realty Trust, data center firm Equinix and Australia-listed NextDC.
Digital Realty has indicated that half of its bookings in the first quarter were “likely related to AI workloads in some form,” and about half of its sales pipeline is also from anticipated AI workloads, according to Citi.
“We believe Digital Realty’s data center bookings are likely to sustain an upward bias and could exceed our outlook based on taking our top-down industry outlook and considering the share DLR can take,” it added. “Digital Realty has an opportunity to get strong bookings and favorable pricing that can fuel better returns on capital.”
As for Equinix, Citi says it provides a “valuable hub” for customers connecting 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,” said Citi.
“We believe growth prospects seem underappreciated at the current price,” said the bank.
Other “diversified” beneficiaries — including those that are converting their warehouse assets — include Singapore-listed Keppel DC REIT, and Mapletree Industrial Trust, and CapitaLand India Trust, according to Citi.
