Data Center Real Estate Demand "Staggering" - Monthly Market Insights from Green Street Advisors

http://www.reit.com In the latest edition of Word on the Beach: Monthly Market Insights from Green Street Advisors, Analyst John Stewart talks about the data center market, which has generated solid buzz among real estate investors of late.

Stewart said that while data center REITs had been riding high, some concerns that fundamentals in the sector may be worsening caused concern and a recent sell-off. However, Stewart said data center stocks still trade at modest premiums to net asset value.

"Consider that a data center REIT like DuPont Fabros Technology (NYSE: DFT), which is the most heavily shorted REIT and among the top 50 most heavily shorted companies on the NYSE, has an in-service portfolio is 100 percent occupied and they have six years of average remaining lease term with credits like Microsoft. After the recent sell-off, it is hard to see what the catalyst is for a significant leg down from here," Stewart said.

Stewart categorized demand in the sector as robust. "The growth of online video, social networking and mobile data traffic is driving intense demand for data centers," Stewart said.

Stewart highlighted a few facts to support his case. He said there are 500 million Facebook users worldwide, and over New Year's Eve they uploaded 750 million photos to the site. To store that much data you need about 4,500 servers, which represents about 1 percent of DuPont Fabros' portfolio. "And that was over one weekend," he said. "Also, there is 24 hours of video uploaded to YouTube every minute. The demand is staggering."

The challenge in analyzing the supply side of the equation is that there is no reliable data source in the data center sector. However, Stewart said Green Street recently held a conference focused on the sector and that provided a reasonable synopsis of sector activity.

"The bottom line conclusion is that the reports of oversupply in the sector have been greatly exaggerated," Stewart said.

Some analysts and investors have concerns regarding data center REITs and the risk of obsolescence. In part, Stewart it is a difficult question to answer because the sector is still very young and the historical data is not available.

"We at Green Street have some to a weighted average useful life for the different components of a data center of 20 years, and I think it is very much an open question and it does make a significant difference on after cap-ex returns on this property type," Stewart said.

By Allen Kenney

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News & Politics

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[empricarock]

interesting. cheers