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Data Center REITs: Enjoying The Digital Realty Boom

Data Center REITs: Enjoying The Digital Realty Boom

Online video streaming services. Businesses moving their IT infrastructure and operations to the cloud. Consumers and companies relying more and more on online storage providers.  

All of these new ways of processing, storing and sharing large amounts of information have led to an increased need for cloud and data hosting. That need is only expected to increase in the near future. Experts predict Internet of Things (IoT) streams will nearly quadruple in size by 2018.  

The data center real estate investment trusts (REITs) that provide the digital real estate for the cloud, streaming and IT hosting services are enjoying the boom, putting their new assets towards investing in expansion projects and acquiring competitors. 

In the first few months of the year, several REITs hit all-time highs in valuation. Even during January’s turbulent trading sessions - rocked mainly by concerns about China’s economy, commodity pricing drops and a global glut of gas and oil supplies - REITs stayed in the clear. 

One might even say they thrived. Their investors received an average 6.48 percent price appreciation. The S&P 500, on the other hand, dropped nearly 4 percent during the first month of the year. 

The data center REITs are responding to the success by investing millions of dollars in massive data construction projects throughout the country. The two largest data center REITs, Equinix and Digital Realty, are expanding their Virginia operations. Equinix’ new campus will have a whopping one million square feet of potential space. Digital Realty Trust, who works with big names including IBM, Facebook, Oracle, and LinkedIn, recently bought a two-million-square-foot property nearby. 

Other big names buying space include DuPont Fabros Technology, CoreSite and CyrusOne. In addition to northern Virginia, they’re investing hundreds of millions of dollars in construction activity in Dallas, Chicago, Phoenix, and Silicon Valley. Globally, experts say the infrastructure equipment market is expected to surpass $135 billion in 2016.  

Merger and acquisition (M&A) activity in the commercial data center space is also expected to pick up in the years to come. Already Digital Realty paid $1.1 billion for Sentrum in 2012, and $1.86 billion to acquire Telx in 2015. Recently we’ve seen Digital Realty express interest in picking up Interxion. In 2015, Digital Realty’s main competitor EQIX bought Telecity for $3.5 billion. 

The mergers help each data center REIT gain a stronger footing in the marketplace, protect against competitor expansion, and allow them to tailor their offerings to different verticals. Geography and marketing positioning are also major factors influencing deals.

While the data center REITs are enjoying the current upturn, it will be interesting to see how things shape up when smaller groups, especially from China, Africa and Eastern Europe, jump in the mix.

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