Industrial Sites Start Flipping To Data Centers Amid Fears Of Logistics Slowdown

Industrial real estate firms are beginning to play a greater role in the data center development landscape, a trend that could accelerate as the logistics sector encounters its first hiccup since the start of the pandemic.

Over the last several months, a growing number of sites once planned for distribution centers have been pivoted to data center projects. The world’s largest logistics real estate player has entered into development partnerships with data center providers, and others have sold properties originally slated for warehouses to companies looking to build massive data center campuses.

Pandemic-driven building booms in both sectors and similarities in siting requirements had previously fueled competition over land between the two industries, but now experts say logistics companies are increasingly exploring whether data center development will drive stronger returns on land holdings in certain markets.

As Amazon’s recent pullback on warehouse growth fuels fears of a broader oversupply of industrial space, more data centers may begin popping up on land previously pegged for logistics. 

“We’re seeing many more of the big industrial groups dip their toes in the water there,” said Kristina Metzger, senior vice president at CBRE and head of the firm’s data center capital markets team. “Industrial developers are absolutely evaluating opportunities to get into the data center market, positioning assets and loans for development and evaluating their existing portfolios.”

In May, industrial giant Prologis and Dallas-based colocation data center provider Skybox Datacenters completed the conversion of a vacant Prologis-owned distribution center in Elk Grove Village, Illinois, into a 30-megawatt, 190K SF data center.

The project in the Chicago-area data center hub is the first in a series of developments planned by the joint venture between the Texas provider and the world’s largest industrial property owner. The companies announced in March that they were collaborating on a greenfield, 30 MW data center near Austin and filed for permission in December to build a facility on a 19.5-acre property in Loudoun County, Virginia. 

There is increasing evidence to suggest that Prologis’ competitors are also looking to data centers as the best use on parcels that, until recently, were designated as future logistics hubs.

Last week, data center giant QTS Realty Trust purchased 400 acres near Phoenix from First Industrial Realty Trust and Merit Partners. The sellers had previously planned a $1.5B logistics park on the site. 

Partnerships such as Prologis’ joint venture with Skybox, in which a logistics firm takes an active role in developing data center properties, remain outliers in the U.S. The company’s leadership said it doesn't see the projects as part of a larger strategy to enter the data center market. 

“Occasionally a global customer will approach us about a data center conversion, or we might JV with an expert in the data center field for a one-off, but this is really just a natural byproduct of owning 1B SF of well-located logistics space around the world and nothing intentional on our part,” Ben O’Neil, Prologis’ senior vice president of global capital deployment, said in an email to Bisnow.

While a handful of data center projects may be a drop in the bucket for the world’s largest industrial landowner, many of Prologis’ competitors in other parts of the world are aggressively moving into data centers.

Logistics developer Logos formed a joint venture with Pure Data Centers for projects throughout the Asia-Pacific market, while U.S.-based Panattoni Development Co. has explored similar partnerships in the UK. Logistics developer ESR Cayman has moved into data center development more directly, touting a 1,200 MW data center development portfolio in the Asia-Pacific region.

Metzger said the major players in the logistics and broader industrial space in the U.S. are increasingly taking a closer look at data centers and evaluating whether a more direct play could be in their future.

“We're seeing entrepreneurial data center developers and operators look at their own portfolios to identify if there is a higher and better use within the data center industry; that's something that we're actively engaged on today,” Metzger said.

“They have a lot to bring to the table: huge buying power, supply chain, global reach and existing land held for future development," Metzger added. "They're very keen to understand whether repositioning those sites and even existing properties for future data center development makes the most sense. We’ll continue to see that over time.”

There has long been a great deal of overlap between the two sectors. They share many of the same tenants, many of the same land requirements and, in many jurisdictions, zoning. As demand for both data centers and logistics hubs exploded during the pandemic, the two industries often competed for the same sites.

On a property that fulfills the criteria for both a distribution center and a data center, the latter use can fetch far higher rents in most major markets. But data centers have more uncertainty around their development: longer timelines, more complications, and far more approvals and logistical difficulties around development. This means that even if land would ultimately earn more as a data center, many landowners have preferred to partner with logistic firms that could develop and lease the land quickly. 

“Especially if they’re flipping these parcels, they know the big logistics guys aren’t asking for 120 days' due diligence, rezoning, verification of power and all that stuff that comes with data centers,” said Andy Cvengros, managing director at JLL’s data center group. “They’ll forgo some profits to get a guarantee of close, whereas data centers can take a little bit longer and are a little more finicky to deal with for people who don’t know how to work with them.”

But some experts say this math is changing as demand for data center space has continued to grow unabated. In markets like Elk Grove Village, Northern Virginia’s Loudoun County and Santa Clara, California, where this insatiable demand for server space has collided with a deep scarcity of developable land, the balance is shifting for certain industrial developers and certain data center operators. 

In these land-constrained markets, conversions of warehouses or other industrial facilities that can be brought to market and leased quickly are now an appealing play for some colocation data center providers.

In today's data center landscape, where the largest operators are focused on hyperscalers and build-to-suit campuses exceeding 100 MW, undertaking an expensive conversion of a single warehouse for around 30 MW — built on land they don’t fully control, no less — has limited appeal for the titans of the industry like Digital Realty and Equinix.

But as Skybox’s Elk Grove Village data center demonstrates, the opportunity for a smaller operator to partner with a logistics real estate giant like Prologis, expand its brand footprint and gain access to more resources can be a tempting proposition. Industry insiders say they expect to see more of these developments going forward.  

“Generally speaking, it’s a one-off approach to getting capacity in tight markets,” Cvengros said. “When there’s tightness in the market and people need to make deals, people try to make anything work, even if it doesn’t really scratch the itch of a big campus development, which a lot of hyperscalers are looking for today.”

Accelerating market forces in the two sectors are also pushing some industrial developers toward data centers. According to CBRE’s Metzger, rising cap rates for stabilized core industrial in key markets have moved up, narrowing the risk gap between the two sectors and casting data centers in a more favorable light to many investors. 

That gap could narrow further if, as some experts predict, logistics developers are on the verge of significantly overshooting demand.

After two years of record absorption for the industrial sector, Amazon’s reversal of its rapid expansion — it is reportedly looking to sublease as much as 30M SF and has delayed new openings — has amplified concerns of surplus supply in the industrial market. As Bisnow previously reported, commercial real estate analytics firm Green Street predicts that developers in the U.S. will likely build 90M SF more a year than will be leased by companies, decreasing occupancy a full percentage point to 94% over the next three years.

Should these fears come to fruition, experts say such an oversaturated logistics market may well lead to more parcels intended for logistics projects ending up as data centers, particularly as logistics developers become more willing to sell land. 

“The industrial market’s a little bit more sensitive to the economic side of things versus data centers, which seem to keep chugging along no matter what’s going on in the world,” Cvengros said. “Before, [logistics developers] were saying there’s no way they’d sell their land because there’s a line out the door for people who want that space. If that stops or slows, they may be willing to peel off properties for data centers.”