Only Lenders With The Deepest Pockets Can Sit At The Data Center Table
The rapidly expanding world of data center development requires massive sums of money, limiting the number of players who can credibly invest in the fastest-growing sector of commercial real estate.
“We've got strong conviction in the data center space. The problem is we just can't write a $2B loan,” Invesco Managing Director Yorick Starr said at Bisnow’s National Commercial Real Estate Finance conference last week. “When you look at a lot of these deals, the numbers are just mind-boggling.”
In April, Vantage Data Centers received a $3B loan to accelerate the construction of its new facilities. That same month, DataBank established a $725M credit facility to finance its data center construction projects. Two months later, another competitor, CyrusOne, secured an $8B loan to fast-track its own deliveries.
But even such gargantuan loans aren't expected to satiate demand. After all, a billion dollars won’t get a developer far in data center construction.
Construction of the core and shell of an average data center facility typically ranges from $125 per SF to upward of $200 per SF, according to JLL research. Infrastructure, which includes electrical equipment, for an average 100K SF data center additionally costs anywhere from $280 per SF to $350 per SF, but it can be much more depending on power and other requirements.
Google earlier this year announced that it would invest another $1B to expand three existing Virginia facilities, bringing the total spent on those facilities to $4B. Meanwhile, in Fort Wayne, Indiana, Google is spending another $2B to build a new data center from scratch.
The facilities will be used to support existing Google services, as well as its growing artificial intelligence products, the tech giant said. Microsoft, in partnership with BlackRock, plans to spend as much as $100B on the build-out of new data centers and other infrastructure to support AI.
“Sponsors are voracious users of capital,” Wells Fargo Managing Director John Gustafson said onstage at the Convene in Times Square.
The rapid rise of generative AI has many developers anticipating further growth in the data center space.
Global data center inventory is expected to triple within six years, with campuses growing larger than ever before, according to Synergy Research. Data center capacity is also expected to reach 35 gigawatts by 2030, up from 17 GW at the end of 2022, Bisnow previously reported.
Industry players are hoping those estimates are on the low end. OpenAI is pushing to build 5-GW data centers, roughly 1,000 times the capacity of a typical data center, The New York Times reported.
“There’s been a huge wave of data center acquisitions, financing, development,” Apollo Global Management Managing Director Catherine Chen said at Bisnow's event. “Some of these data center construction deals are upwards of $800M, $900M, $1B.”
Because of the eye-watering costs, borrowers are looking for more and more lenders who can provide the financing needed, and more lenders are trying to find ways into the game. Wells Fargo began building its expertise in the sector in 2018 and has further zoned into the space since, Gustafson said.
“It seems like every day, we’re seeing five more lenders learning the space and trying to get in it,” he said. “These deals are large, it’s significant capital in individual transactions, and it’s just continuing to grow.”
At the same time, developers are facing a lack of sites in prime locations with access to much-needed power. That has further established barriers for developers, along with their lenders.
To overcome those hurdles, some sponsors are getting creative, Poverni Sheikh Group CEO Eugene Poverni said.
That includes taking old campuses or aging manufacturing buildings that already have access to necessary power and potentially converting them into data center use. Doing so also opens up opportunities for smaller lenders.
While Remington Firearms closed its plant in upstate New York's Mohawk Valley, where it had operated for 200 years, a developer is already planning to convert the facility to data center use, Poverni said.
“It takes forever to get power. There’s not enough power capacity in the states for all the data centers we think we need,” Poverni said. “They have no interest in the manufacturing facility. They have interest in the power that's already there.”
