Key Takeaways from NAIOP’s Data Center Summit – Market Share

By Brielle Scott

From skyrocketing demand to evolving technologies, the NAIOP Data Center Summit highlighted what’s next for this rapidly expanding industry. Over the course of the day, experts shared insights on investment trends, development challenges and emerging technologies that will define the future of data centers.

Key takeaways include:

• The demand for data center investment is seemingly endless. This assertion was virtually unanimous among panelists at the summit. McKinsey research shows that by 2030, data centers are projected to require $6.7 trillion in investment worldwide to keep pace with the demand for computing power. Many other parts of the global real estate market are soft right now, as one speaker pointed out, so everybody wants to get into data center investment. Players in the market are seeing a lot of sovereign wealth funds, large pension funds, and just about every top U.S. bank you can name.

• Capitalizing deals on this scale requires creativity. When you’re looking at projects that cost anywhere from $10 billion to $30 billion, developers don’t have the ability to put in the type of equity they typically would. So traditional funds to REITs to forward takeouts are coming together to finance these megaprojects. Funds that hadn’t been invested in data centers just a couple years ago have been able to enter the space and push for terms and deal structures that work for them because of the incredible demand for capital. Some hyperscalers (massive, highly scalable data centers built to handle large-scale workloads like those for AI, big data and cloud computing) have been more amenable to different and creative structures because they know how difficult it is to capitalize transactions on this scale, one panelist shared.
• The “missing middle” is an underserved part of the market. For those only reading the headlines, it may seem like all data centers are built by hyperscalers and there are four big tenants: Amazon, Meta, Microsoft and Google. In reality, there are myriad retail/collocated data centers (facilities where businesses can rent small-scale space, such as individual server racks or cages), the well-known large hyperscale campuses with both cloud and AI training, and what some call the “missing middle” of 100-150-megawatt data centers. There is a massive amount of demand emerging in that middle sector – the sub-$500-million-transaction range – panelists said, and it’s not really covered in the news.

• The capital required to lock in power is increasing significantly. In Texas, it costs $6 million to complete an ERCOT [Electric Reliability Council of Texas] study. Some states now require an almost $100 million minimum down payment for power that won’t be available until 2030 or later; in others, developers are required to pay for 80% of the power the utility has agreed to provide for a project even if it goes unused as utilities try to hedge pricing concerns. The approval processes with utilities are also getting longer, more detailed and complex.
• With the large and increasing power demands of data centers, all forms of energy are on the table. Wind, solar, batteries, gas – all are needed to meet the rapidly increasing demands on the grid. Nuclear might look more realistic in a few years as prices come down and regulatory policies catch up. The data center investment boom is funneling a lot of private capital into innovation around technologies that may have stalled for the past 30-40 years, and many are optimistic about what innovation could come out of that cash infusion.

• Community integration and communication remain critical. With NIMBY sentiment common around data centers, conveying a project’s benefits to the community – like infrastructure investment, long-term tax revenue, better fiber, higher-speed internet – can be a more successful approach than going in with a list of demands for tax credits, for example. There was also discussion among the group about how much of the negative sentiment around these facilities is because data centers are a bit of a scapegoat for the societal anxiety around AI replacing jobs.

• Lease structures are unique and continue to evolve. Data centers are unique in the investment world because of the wide range of lease structures out there, panelists said.  When multitenant data centers emerged around 15 years ago, leasing terms were traditionally full-service gross leases on a turnkey basis – much different from the net lease structures panelists are seeing more often now.

• Water use is emerging as a key challenge. While power and energy were buzzwords throughout the day, water is becoming a significant concern for projects and in the communities surrounding data centers. Participants agreed that projects need to address how to mitigate concerns around water consumption now and into the future. Closed-loop systems show some promise; they recycle water for cooling on-site using power that’s already being generated.
• Data centers have the potential to shape the built environment in meaningful ways. Instead of treating them as isolated structures, it’s possible to integrate them into the landscape, bury them or connect them to underground systems. They could be distributed across a site, broken into smaller components, and enclosed in new types of shells.

The conversations at the summit underscored a clear message: Data centers have become a modern utility, are reshaping the built environment and will continue to do so for decades to come. With power, water and community concerns at the forefront, the industry’s ability to adapt will be critical to sustaining growth.