One of the largest industrial real estate developers in the U.S., Panattoni is making a significant shift by venturing into data center development. Driven by skyrocketing demand from the artificial intelligence sector, the Irvine, Calif. based company plans to develop a gigawatt of data center capacity over the next five years — enough to power about 876,000 homes. Panattoni intends to build data centers on its existing land and acquire new properties, with each facility ranging from 100 to 500 megawatts of capacity.

Notably, the company has hired Adam Kramer to lead its data center team. Previously, Kramer served as the CEO of nZero, a carbon management platform focused on helping organizations achieve net-zero emissions. He also held an executive position at Switch, a leading technology infrastructure provider.

In a recent interview with The Wall Street Journal (WSJ), Doug Roberts, president of Panattoni’s North American development group, said, “You want to be where the customer is and, right now, the customer wants to be in the data center world.”

Panattoni isn’t alone in this trend: Other major industrial developers are also jumping on the data center bandwagon. For instance, Prologis — the world’s largest industrial real estate operator — has plans to invest between $7 billion and $8 billion to kick off its own data center business focusing on energy procurement, production and storage, as reported by Bisnow.

Similarly, Seefried Industrial Properties, which has developed more than 200 million square feet of industrial space, is also making strides in the data center market. Ferdinand Seefried, the company’s outgoing CEO, told Bisnow that data centers “will keep a bunch of developers busy” in the coming decade, adding that industrial builders learning how to construct them “is not such a dramatic thing.”

The growing demand for data centers has caught the attention of tech giants and investment firms, too. Namely, Amazon recently announced plans to invest more than $100 billion in the next decade on data centers, while Blackstone revealed that its data center portfolio was valued at $55 billion with a pipeline of more than $70 billion in prospective development.

However, building data centers comes with its own set of challenges. According to Pat Lynch, head of CBRE’s global data center solutions group, these facilities are pricey to develop compared to warehouses and require vast amounts of power to run and cool the servers and hardware inside.

“It’s a significant investment. It’s a very specialized investment,” Lynch told WSJ. “There’s a lot of risk that goes into that build-out.”

Despite these hurdles, Panattoni views the data center market as a promising opportunity. In the same way, Roberts likened this shift to the company‘s earlier adaptation to the rise of e-commerce fulfillment centers.

“We had to learn that sector and said, ‘We’re going to take that on and figure it out because that’s what our customers want,’” he explained. “This is no different. The data centers present an opportunity.”

As reported by CommercialEdge in its latest monthly industrial report, data center construction is on the rise, reaching 14.2 million square feet in 2023 — up from an average of 10 million square feet in the three previous years. Even with a slowdown in overall industrial starts, this growth underscores the increasing importance of data centers in today’s industrial market.