Archives for March 2022

The pandemic accelerated the use of digital platforms and cloud services, generating a surge in data center development that is attracting tons of capital.

The pandemic helped ramp up data center usage, as businesses suddenly faced a greater need for cloud technology to connect and support remote workers. This increase in cloud migration has accelerated growth and expansion of data centers globally, causing major data center operators to expand their footprints, according to a recent report from commercial real estate services firm Cushman & Wakefield (C&W).

“The reliance on technology platforms over last 24 months is at an all-time high, creating demand for more data center space across the world,” says Phoenix-based Carl Beardsley, senior director with JLL Capital Markets, who notes that the big operators and users are responding by building-out data space and turning it over at a high velocity.

Over the last year, U.S. users absorbed 500 megawatts (MW) of data space, says Dallas-based Bo Bond, executive managing director and leader of C&W’s global data centers team. The majority of that absorption was driven by “hyperscalers”—the largest occupiers of data centers, which are mostly cloud services firms including Google Cloud, Amazon Web Services (AWS) and Microsoft.

JLL tracks both colocation absorption and hyperscale development activity, according to Beardsley. In terms of absorption activity in the colocation space, the top five or six U.S. markets typically see 70 to 80 percent of all activity, he notes. These markets include Northern Virginia, Phoenix, Chicago, Santa Clara, Calif., Dallas, and the Pacific Northwest.

These top markets are all seeing a significant amount of new development, but in recent years both Phoenix and Hillsboro, Ore. experienced an increase in colocation development because they offer competitive tax benefits, low-cost power, relatively low land costs and a quick entitlement process, Beardsley says. These factors also are attracting public cloud users.

Data center developers are looking for additional capital to keep up with the added demand, and they aren’t disappointed, as data centers are currently among the hottest U.S. alternative real estate investment sectors, and a lot of investors are entering this market for the first time.

“Historically, data center capital markets were a mix of data center operators, infrastructure funds, data center REITS and investors that partner with preferred operators,” Beardsley notes. “Now, there is a large influx of institutional capital looking for higher-yield opportunities that performed well through the pandemic that are shifting attention from ‘core’ asset classes to this sector,” he says.

“There is a ton of money going into this sector,” adds Bond, noting other new entrants, including private equity funds, investment funds set up to specifically invest in data centers and sovereign wealth funds all have entered this market. There are also infrastructure funds that have switched from roads and bridges to data facilities and towers.

In fact, there is so much money going into big public data center REITs that they are consolidating and going private. Three of the largest data center REIT portfolio acquisitions ever occurred last year when CyrusOne, CoreSite Realty and QTS Realty were taken private. For example, Blackstone acquired QTS for $10 billion.

A surge in user demand over the last six to 12 months for large blocks of space is driving new development, with some users even taking whole buildings of 250,000 sq. ft. or more, Beardsley says. In fact, demand for single tenant data centers exceeds demand for multi-tenant space in some top markets like Northern Virginia, where 53 percent of users are seeking single-tenant centers.

“It can be difficult for users to forecast future IT loads, so these end users must ensure they are procuring enough space to continue to scale with business demands,” Beardsley says.

Demand for data center space is so strong that Beardsley notes the cloud services providers doing greenfield development are attracting institutional capital.

While hyperscalers lease a lot of data space from colocation operators, Bond says a huge acceleration in cloud-based services is also driving a surge in development by cloud companies. Beardsley notes that the top five hyperscalers are building out in primary markets, as well as areas not dominated by data center operators, such as Iowa, New Mexico, Nevada and Ohio. “These hyperscale users typically buy large land parcels—300-plus acres—and build out a campus with multiple buildings,” he adds, noting that they often require additional resources that can be difficult to obtain at urban in-fill sites.

“As use of cloud-based computing increases, hyperscalers will continue to build out in secondary and tertiary data center markets,” Beardsley says.

For example, Google Cloud plans to build new data centers in Nebraska, South Carolina, Virginia, Nevada and Texas, according to an announcement made by Alphabet and Google CEO Sundar Pichai last May. Apple will also begin construction this year on a $1.3 billion data center in Waukee, Iowa that has been on it drawing board since 2017, reported KCCI Des Moines. And Meta (Facebook) is building a new $800-million data center near Kuna, Idaho, to support its future metaverse, reported Data Center Frontier.

AWS is building data centers in new markets around the world, but its biggest play is right here at home. The tech giant plans to spend $35 billion to build four data centers with more than 1 million sq. ft. on an 80-acre site adjacent to the Manassas mall in Prince William County in Northern Virginia, according to DCD News. The company’s data center revenue increased by nearly 40 percent year-over-year in the third quarter of 2021 to $16.1 billion,

And Microsoft has unveiled an aggressive plan to build 50 to 100 new data centers across the U.S. and around the globe each year for the foreseeable future, reported CRN, as it expands its Microsoft Azure cloud offerings worldwide.

Source: “Growing Demand Continues to Drive New Data Center Development“

If COVID is less deadly and less restrictions need to be in place, that is an important shift in thinking.

As COVID cases ramp down, the outlooks for office, hotel, and retail are on the rise.

But “there’s an important change happening,” says Marcus & Millichap’s John Chang. “I’m hearing the word ‘endemic’ being used more frequently.”

And if COVID is in fact less deadly and less restrictions need to be in place, “that is an important shift in thinking, a trigger point,” Chang says. “If COVID is considered endemic, that implies government restrictions will be reduced and people will finally begin to get back to normal.”

That change is already manifesting across a variety of sectors: air travel is a mere 8% below pre-pandemic norms, and hotel occupancy rates are “nearly back in alignment” with pre-COVID numbers. A deeper dive into the data, Chang says, shows that limited service hotels are ahead of pre-pandemic occupancy rates. Full service hotels are still falling short as business travel struggles to rebound, but “If we do get to the point where COVID is endemic, full service hotels could gain momentum.”

A rising percentage of employees are also returning to the office, though still below the most recent peak of last December between the Delta and Omicron waves.  Chang says absent another wave of new COVID infections, we’ll “finally’ begin to see how the future of office demand plays out.

Chang also predicts the demand for retail space could accelerate, especially for experiential concepts and gyms, restaurants, and movie theaters.

“Hope springs eternal,” Chang says. “And I’m pretty optimistic about the possibility of getting through this pandemic and getting back to business. That will bring a lot of properties that investors have been cautious about, like offices and retail centers, back into the mainstream. It’s simply a matter of time.”

Source: “How Office, Retail and Hospitality Can Reposition As COVID Wanes“

Like many companies, third-party diligence companies are feeling the strain of supply chain disruption.

It seems that no industry is exempt from the supply chain issues that are plaguing the economy. These challenges are affecting third party companies that provide due diligence support and documentation to buyers during a transaction, essentially elongating the process. As a result, sellers are now requesting shorter due diligence periods as one of the most popular concessions.

“In this COVID-19 environment with supply chain delays and worker shortages across all sectors, third-party real estate diligence vendors—like title companies, surveyors, environmental engineers and appraisers—are feeling the strain like other industries,” T. Gaillard Uhlhorn, a member at Bass, Berry & Sims PLC, tells GlobeSt.com. “As a result, it is taking purchasers longer to get their standard diligence reports for review from their providers.”

These documents include title commitments, surveys, property condition reports, Phase I environmental site assessments, appraisals and so on, according to Uhlhorn. With limited access to these documents, sellers are responding by pushing for expedited closings. “This trend is making the push for shorter diligence period and closing periods even more stressful on potential purchasers,” says Uhlhorn. “This is an interesting trend we are witnessing in many markets.”

Buyers eager to win deals have offered nonrefundable offers to beat out competition, but on the seller side, seller-requested concessions are becoming common. Shortened due diligence periods are among the most popular, but Uhlhorn notes that there are others. “In addition to “nonrefundable” deposits, sellers can demand other concessions from potential purchasers like increased earnest money deposits, shorter diligence periods, shorter closing periods, fewer seller representations and warranties, lower caps on liability for breaches of representations and warranties, or fewer conditions to close,” he says. “In a hot apartment market, a purchaser will need to stretch to make returns pencil out and to ensure that its offer is the best to win the deal.”

Whether a seller requests an expedited due diligence period or not, buyers will still need to work efficiently to execute with supply chain-related challenges. Some experts recommend coordinating and consolidating site visits as one solution. When possible, schedule to have the whole due diligence and lender team walk the property and units at the same time. This will help to limit intrusions for the residents and sellers and provide safety and peace of mind.

Source: “Sellers Push for Shorter Due Diligence Periods Amid Supply Chain Issues“

The 2022 Commercial Real Estate International Business Trends report discusses the trends in foreign buyer purchases of U.S. commercial real estate in 2021 in the “small commercial real estate market” (sales of below $2.5 million) and in the “large commercial real estate market” (sales of $2.5 million or over). The year 2021 was a remarkable year for the commercial real estate market because it bucked expectations of a prolonged downturn.

While the office property market had a huge loss in office occupancy of about 143 million square feet from 2020 Q2 through December 2021, absorption increased in the multifamily, industrial, and retail trade sectors. Since the pandemic, about 1 million more rental apartment units have been absorbed through December 2021. In the industrial property market, nearly 700 million square feet was absorbed since 2020 Q2 through December due to the strong demand for logistics space to support the acceleration of e-commerce. Surprisingly, the retail brick-and-mortar property market saw positive net absorption of 48 million square feet since the pandemic, with strong absorption of neighborhood malls and strip centers that offset the declining occupancy in malls. Hotel occupancy rates also rose in 2021, to about 56% by year-end from 42% in the prior year due to rising vaccination rates and more personal and business travel.

Meanwhile, in the “small” commercial real estate market where approximately 80,000 commercial members of the National Association of REALTORS® mostly do business, NAR estimates that foreign investor acquisitions of commercial real estate facilitated by NAR commercial members more than doubled in 2021, to $4.8 billion from $2.0 billion in 2020. Foreign buyer transactions accounted for 3.1% of the estimated commercial transactions of $155.9 billion among NAR commercial members. Florida, Texas, and California were the top destinations. Latin Americans were the major investors. Individual investors made up 97% of this market. NAR commercial members expect an increase in foreign buyer transactions in 2022 in all markets, except the office market.

View the full report here.

Source: “NAR Commercial Real Estate International Business Trends, February 2022“