The Hot New Trend in Commercial Real Estate? Renting to Data Centers

U.S. real estate developers "are having a hard time keeping up with demand," reports the Los Angeles Times, "as businesses in search of secure spots for their servers rent nearly every square foot that becomes available..." Construction of new data centers is at "extraordinary levels" driven by "insatiable demand," a recent report on the industry by real estate brokerage JLL found. "Never in my career of 25 years in real estate have I seen demand like this on a global scale," said JLL real estate broker Darren Eades, who specializes in data centers...

The biggest drivers are AI and cloud service providers that include some of the biggest names in tech, such as Amazon, Microsoft, Google and Oracle. With occupancy in conventional office buildings still down sharply following the impact of the COVID-19 pandemic and property values falling, data centers represent a rare ripe opportunity for real estate developers, who are pursuing opportunities in major markets like Los Angeles and less urban locales that are served by plentiful and preferably cheap power needed to run data centers. "If you can find a cluster of power to build a site, they'll come," Eades said of developers. Construction is taking place at an "extraordinary" pace nationwide and still not keeping up, the JLL data center report said. [Data center] "Vacancy declined to a record low of 3% at midyear due to insatiable demand and despite rampant construction."

Development increased more than sevenfold in two years, with the pipeline of new projects leveling off in the first half of 2024, a potential signal that the U.S. power grid cannot support development at a faster pace. But when projects currently under construction or planned are complete, the U.S. colocation market, in which businesses rent space in a data center owned by another company for their servers and other computing hardware, will triple in size from current levels... Real estate investors and landlords are being drawn into the market because demand from tenants is high and they are likely to renew their leases after shouldering the costs of setting up data centers. "They invest in their space and in your space and they tend to stick around longer," said Mark Messana, president of Downtown Properties, which owns offices in Los Angeles and San Francisco. "As we all know, the office market is struggling a little bit, so it's nice to be able to have some data customers in the mix..."

Power demand for computing is growing so intense that it threatens to strain the nation's electrical grid, sending users to remote locations where power is plentiful and preferably cheap. Data center developers are working in Alabama, the Dakotas and Indiana, "traditionally states that wouldn't have data centers," Eades said.
The article includes "the mother of all data centers" in the western U.S. — a 30-story building where "thousands of miles of undersea fiber-optic cables disappear into an ordinary-looking office tower." Once a prestigious location for businesses, "The recent departure of a law firm that had been in the building more than 50 years cleared out five floors that will quickly be re-leased to data tenants, said Eades, who represents the landlord..."

To retrofit the building for data centers, "two elevators were removed so the empty shafts could hold water pipes used to help keep the temperature cool enough for the heat-producing servers" — and developers are happy rents "can be double what they are at newer downtown office high-rises, according to real estate data provider CoStar...

"By 2030, data centers could account for as much as 11% of U.S. power demand — up from 3% now, according to analysts at Goldman Sachs."

Colocation

[phantomfive]

What are they using it for? It can't all be AI and Crypto.

Re: Colocation

[madsh]

When every three people dev team is trying to have ten environments with instances of every service and testing five alternative build pipelines while security is scanning every single build - to run webserver serving static html

Re: Colocation

[phantomfive]

Those dev teams are building on AWS or Azure.

Re:

[GoTeam]

Those dev teams are building on AWS or Azure.

The biggest drivers are AI and cloud service providers that include some of the biggest names in tech, such as Amazon, Microsoft, Google and Oracle.

I would assume that means AWS and Azure are in many of these data centers.

Old news

[will4]

During the 2008 financial panic, NPR (?) covered a story on how a Manhattan office building, too old to meet apartment or office building codes, was turned into a self-storage unit facility. The rent per square foot was 75 or 80% of an apartment rental but required 20% of the costs since there was no running water, no water drains, no toilet, no shower, no AC. Net, net it was more profitable than an apartment or office building.

Converting Old Office Buildings Into Outstanding Self-Storage Facilities

https://www.insideselfstorage.... [insideselfstorage.com]

No rent controls

[will4]

Forgot to add that, since it was not an apartment building, there were no rent controls and no onerous laws to follow to evict a non paying tenant.

Re:

[dknj]

onerous laws to follow to evict a non paying tenant.

imagine making things up for mod points

NYC storage law must follow NYS storage law, and as such you must have a lease and you must evict in a similar manner to apartment tenants. this means itemizing everything in said storage and holding them safely for at least 60 days, but likely longer since an attempt at arbitration (read: court judgement) is required before a lien may be fulfilled.

* new york city law on storage [nyc.gov]

* new york state law on storage [nysenate.gov]

Re:

[CohibaVancouver]

was turned into a self-storage unit facility

There are many things about human behavior that fascinate me.

One of those things is people's willingness to spend $5,000 per year (or more) for years and years to store things worth $1,500.

https://946e583539399c301dc7-1... [rackcdn.com]

Re:

[dknj]

A storage unit is an extension of your dwelling. If your home cost $250/sqft, then a similar house with an additional 100sqft would cost $25,000, or roughly $53k with interest payments of a typical 30-year mortgage. However a 100sqft storage unit won't cost $415/mo. In my area (major metro) it is $125/mo or $1500/year. Which comes out to being about 35 years of rental to match the cost of a similarly sized home.

Now look at your house. What parts of your house only stores things worth $1500? Maybe you sh

Re:Colocation

[jonbryce]

It is AI. Crypto miners, at least in the Uk, rent regular industrial units and bypass the meter to steal electricity. It is not commercially viable to mine crypto if you are paying for the electricity. AI is companies like Google, Microsoft, and Amazon, who do pay for their electricity.

Re:

[will_die]

From the microsoft side you also have all the organizations switching away from on-prem AD, and office pps to microsoft intune and office 365.
So the power usage is going from being spread around to company located server rooms to these centralized server rooms.

Re:

[blue trane]

https://www.theverge.com/2012/... [theverge.com]

"Microsoft deliberately burned through "millions of watts of electricity" to avoid a penalty for overestimating its power use last year, according to the New York Times. The company planned to continue wasting power at dozens of diesel generators in Quincy, Washington until the $210,000 fine was cut. Microsoft uses the utility as a backup for a large hydroelectric data center dedicated to cloud services and billed as a green, efficient facility."

Re:Colocation

[leonbev]

What's weird about this is that a bunch of corporate data centers just shut down because they moved most of their servers to cloud hosting like AWS and Azure.

Are they really going to build new data centers for AI, or are they just going to refurbish and reopen the ones that already exist?

Re:Colocation

[Ed Tice]

For every corporate data center that shuts down because they moved to a cloud hosting like AWS or Azure, Amazon or Microsoft has to build out equivalent capacity. The cloud might appear infinite, but it's not. There have to be physical servers somewhere.

Re:

[blue trane]

Have you heard about economies of scale?

Re:

[jsonn]

Have you heard about the laws of physics?

Re:

[leonbev]

I'd imagine that AWS and Azure are probably packing in their servers at 2 or 3 times the density of what your average corporate data center was. They're still going to need to expand, but it's not going to be a 1 for 1 comparison.

Re:

[Ed Tice]

I said equivalent capacity, not equivalent space. If the smaller corporate data centers were suitable for Azure/AWS, Microsoft or Amazon would be offering deals where you sell them your data center for huge credits. The big cloud providers are going to want larger, denser data centers. So in the short-term, there is build out of massive data centers while smaller ones will become abandoned industrial buildings.

Re:

[NoWayNoShapeNoForm]

If Corps owned that data center that they closed out then they might sell it to gain back some capital $$ to invest in something that direct impacts/influences their core business(es). And some will just pocket the savings.

If it was rented / leased space, then the building owner gets to decide what to do with it while the Corp funnels the $ spent on renting space into renting cloud space.

The smart data center owners that want to stay in the rental game should consider capital improvements that have big bang

Re:

[JBeretta]

What's weird about this is that a bunch of corporate data centers just shut down because they moved most of their servers to cloud hosting like AWS and Azure.

Yeah... But the servers still have to physically exist... Moving to the cloud means you don't own the server anymore... But someone still has to have the server for you to use..

Re:

[Cyrano de Maniac]

Yeah... But the servers still have to physically exist... Moving to the cloud means you don't own the server anymore... But someone still has to have the server for you to use.

Someone still has to have the virtual machine for you to use. I would imagine many corporate data center machines are running at substantially less than full capacity, as is their storage. Consolidation across many customers at a cloud service should allow for more efficient use of hardware and thus power, running as close to full capacity as possible at any given time, and with cooling systems built out at a larger scale which increases efficiency. This is where the cost savings are to be had.

Re:

[JBeretta]

Yeah... But the servers still have to physically exist... Moving to the cloud means you don't own the server anymore... But someone still has to have the server for you to use.

Someone still has to have the virtual machine for you to use. I would imagine many corporate data center machines are running at substantially less than full capacity, as is their storage. Consolidation across many customers at a cloud service should allow for more efficient use of hardware and thus power, running as close to full capacity as possible at any given time, and with cooling systems built out at a larger scale which increases efficiency. This is where the cost savings are to be had.

It is more efficient. But it also concentrates the power usage in extremely dense points instead of being spread out over a wider geographical area.. As for Virtual Machines.. Fine if your servers don't run full-tilt all the time.. Not useful when you have heavily loaded servers.. Regardless, if a company moves dozens or hundreds of servers to the cloud, the cloud company is probably going to have to increase their capacity... Even if they're using virtualization. You don't just unplug 50 severs and

Re:

[javaman235]

I wonder if they can develop for dual use, I mean what does a data center really need in terms of sunlight and surface? I picture a nice small home suburb, where no one needs to think about the fact that underneath the houses about 20 feet down, is a sprawling data center.

Re:

[NoWayNoShapeNoForm]

It has been done before.

The example linked below is not 20 foot down, but looks like it's all at ground level, or a step up or down.

The problem is having enough rentable floor space and still have space on the property for chillers, A/C, security, power & data vault(s), and so on. After all, it is a residential neighborhood so it has to fit in with "the look" and various codes & regulations for that setting. Think: lot-line setbacks, allowable noise generation, allowed lighting, location & heigh

Re:What a waste, "data" for nothing

[az-saguaro]

As I am not an architect or civil engineer, I don't follow their journals, and I have no idea what they discuss or if any of the following is being researched or conceptualized. But, your comment suggests a crucial pathway for future urban planning and integration. If you could build a new city or urban encampment from scratch, maybe it should have the following.

Massive data center underground, deep enough to not visibly interfere with the usual urban or suburban environment above.

Above that, but still underground, indoor urban structures that do not need outdoor accessibility or views, such as shopping malls and office spaces.

Above that, at surface, residential structures, small-business spaces, civic and commercial structures that benefit from an outdoor view, and public outdoor spaces such as parks.

Above that, solar capture technology, on all roofs, and elsewhere as possible.

Surrounding the urban zone, solar farms serving dual use with shade tolerant agriculture and wildlife conservation.

Also underground would be utilities, including battery storage for solar energy captured.

As much as possible, locally captured energy powers the data center.

Excess heat from the data center provides heating for the human habitation structures above, making this concept especially useful for more northern climes that have a longer cold season to benefit from the waste heat (but hampered by less solar exposure - - versus building at southerly latitudes and selling or sharing power on the grid).

Street level could be engineered to facilitate public transportation and safe self-driving vehicles.

It seems to me that with thoughtful planning, modern tech and urban life could cooperate and thrive in an economical and environmentally friendly way.

Of course, people, politics, and proprietary issues being what they are, no existing city will do so.

But, if the will was there, and some of the sinfully rich tech companies diverted their pointless multi-billion dollar losing purchases and acquisitions to something visionary and inspirational, they could do this with new "company towns" and start a trend.

Talk with Sears and Roebuck again?

[Chas]

Seer how banking on that plan worked out for Sears and KMart.

One Wilshire

[EvilSS]

The article talks about One Wilshire like it's something new. That building has been one of the largest telecom hubs on the planet since the late 1990's. Honestly I'm surprised there were any normal tenants left in it at all.

Telco, not "AI data centers"

[bjamesv]

The article talks about One Wilshire like it's something new. That building has been one of the largest telecom hubs on the planet since the late 1990's. Honestly I'm surprised there were any normal tenants left in it at all.

Yeah, that is 30 stories of telco exchange. Every major global city has one building like that, very specialized. These are nothing like the same size as one of the many, actual, world-leading compute or storage datacenters out there.

If not telco then most of these urban tower refit customers in my experience are small, cost-concious businesses like Bank Of America - not cutting edge demand or scale.

2Br 1 Bath - Data Center Ready

[Arzaboa]

We are offering a 2 Bedroom, 1 bathroom apartment that is data center ready.

This wonderful apartment sits in a beautiful neighborhood with great schools. There are 3 grocery stores within walking distance. All counters are marble. Appliances not included.

The plugs are up to spec at every 6 feet on a wall. Use as many power strips as you like. First come, first served.

--
Well, real estate is always good, as far as I'm concerned. - Donald Trump

What about all that vacant office real estate?

[SeaFox]

I thought there was some sort of crisis in commercial estate with buildings going unused due to work from home, and companies trying to get rid of the expensive leases they have for those offices. While the idea has been floated to convert those offices into residential units the lack of plumbing and climate control infrastructure for so many independent living spaces has been a hurdle. L

Wouldn't this be a fine use for all that space? Servers don't need to shower, will all live together without arguing over the thermostat, and there's high speed networking already present.

Re:

[bjamesv]

Yes, that is a very common occurrence - office space tennets move out, clients with server racks (and cost or some other reason to be geographically located in that specific town) move in. The article is just a lot of words to say this continues to become more common at a healthy pace.

The only thing you got wrong are the showers & plumbing. One Wilshire building in TFA removed two of the elevators & repurposed the shafts to hold the increased plumbing needs of 30 floors of server rack cooling. Se

Re:

[sound+vision]

HPC needs a ton of water and AC. Whatever networking gear there was in the office would need to be ripped and replaced. You might not even be able to use the conduits, depending on the specifics of the floor plan.

When will one collapse?

[thogard]

Full racks are heavy. Most office buildings are built to deal with office floor loads, not computer racks. The heavy part of an office will be 5 drawer file cabinets. A 2x4 ft rack can weigh 2 tons. I wonder when the first converted building won't be able to deal with the floor loadings.

What about wiring needs?

[MtViewGuy]

I wonder could an empty office building be converted to a data center at reasonable cost. The need to high-quality power supply to all the server machines and adding in all that network wiring could cause more problems than necessary.

Remember 33 Thomas Street in New City, that tall skyscraper with no windows? Because that building was designed specifically to handle large amounts of electrical equipment with a very stable power supply to the building plus the installation of proper wiring between all that t

AI making jobs

[Visarga]

This is AI creating work for humans. Expect many unexpected fields to raise together with AI, like real estate in this case. It's hard to imagine the extra work we will do with AI, we can only imagine the work it would automate. But usually we swap one kind of work for another. We occupy all the resources - human and technological - to the max. It's induced demand, when capability increases demand levels up.

Why not supply the big picture energy context?

[blue trane]

https://www.eia.gov/energyexpl... [eia.gov]

Do the two graphs at the bottom of that web page, US Primary Energy Production and US Primary Energy Consumption, show that we can easily handle an 11% increase in demand because US energy demand has been flat or falling for a couple decades? Do we in fact produce much more energy than we consume?

Re:

[blue trane]

Why does the latest available (2014) Sankey diagram for Utah, which generates most of its electricity from coal, show the same electrical generation efficiency as Washington in 2014, which gets most of its electricity from hydropower which is much more efficient? Why should hydropower generation produce the same 66% of rejected energy as coal generation plants, when the former are significantly more efficient?

Is the most reasonable interpretation that we are way overgenerating electricity and sending up to

Re:

[blue trane]

https://flowcharts.llnl.gov/co... [llnl.gov]

Joining this thread late, but...

[TigerPlish]

I can foresee with full confidence this bubble will burst too, and when it does, the resulting carnage will be much worse than the dot-com bust.

That said, my sci-fi-addled brain sees a future of AIs living in city-cized datacenters lording over us by proxy of our "elected leaders."

The computers will make the decisions and hand it down to the humans to propagate to their underlings. If they even bother with the human middleman.

Uncomfortably close to WarGames and Terminator.

In War Games, man was removed from

Re:

[echo123]

In Terminator, the AI just decided to wipe us out before the fact and almost got away with it.

Skynet became self-aware at 2:14 a.m., EDT, on August 29, 1997 [wikipedia.org]. So far, so good.

What's new about this?

[walterbyrd]

I thought commercial real estate has been renting to data centers for decades?

Re:

[mcnewman]

It's true that data centers have been part of the commercial real estate landscape for a while, but the demand is unprecedented right now. I recently worked on finance assignments related to this trend, and the numbers are staggering. Using resources like https://essays.edubirdie.com/finance-assignments [edubirdie.com] helped me dive deeper into the topic and understand the rapid growth in this area. Developers are scrambling to meet the needs of tech giants like Amazon and Google. I also noticed that the rental income fro