AI Demand Boosts Data Center REITs
These companies should be having their moment for a long time, writes Fitch Ratings' Chris Wimmer.
The growth of artificial intelligence has reignited demand for data centers. On the heels of tailwinds driven by e-commerce and the expansion of all-things-digital, the increased adoption of AI will further increase the need for significant data center real estate space in the U.S. and globally. According to Dominion Energy of Virginia, home of the largest data center market in the U.S., AI-driven demand for data centers will outpace the current power supply in its service area starting in 2031.
REITs with management expertise and improved capital access stand to benefit the most. Data center REIT equities have seen strong performance in recent months, and the sector is one of the few that trades at a premium to underlying value. Data center REITs have also generated additional capital through partnerships with large institutional investors and CMBS. The largest technology firms—Alphabet, Amazon, Meta and Microsoft—continue to demonstrate record spending on capital expenditures.
Strong secular growth
Fitch-rated Equinix (BBB+) is supported by secular tailwinds including internet adoption, mobile data usage, 5G deployments, cloud storage, IT outsourcing and migration away from on-premise data centers. This is driven in part by the increase in remote working since the pandemic, as companies upgrade IT infrastructures and shift workloads to the public and private cloud. At the same time, consumers are also driving demand for streaming content, which boosts demand for data center space.
Digital Realty Trust (Fitch-rated BBB) is supported by increased internet utilization and the migration to cloud services. While Digital Realty has benefited from the growth in cloud services in the near-term (and counts several of the largest cloud providers among its top 20 tenants), it faces a long-term competitive risk from providers like Amazon, Microsoft and Alphabet for its hyperscale product.
Global operating scale is a critical performance factor for data center REITs like Digital Realty and Equinix. Companies with competitive global networks are poised to benefit from strong secular growth driven by technology and AI trends.
Chris Wimmer, CFA, is senior director, Fitch Ratings.
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