Home Insights Real estate Data centers: Poised for a new wave of growth

AI's explosive growth is propelling the data center sector into a new era of demand, driven by surging capacity needs and record-low vacancy rates. High barriers to entry and the critical role of data centers in the digital infrastructure make the sector a compelling and resilient investment opportunity amidst the evolving commercial real estate landscape.

The data center sector is on the cusp of a significant growth phase, underpinned by the surging demand for artificial intelligence (AI) capabilities. On a global scale, the sector's fundamentals are robust, with double-digit rental growth while vacancy rates near record lows. Historically, demand was primarily fueled by the rise of streaming services and the transition of enterprise servers to the cloud. This segment alone is expected to continue growing at a steady 13% pace annually. However, the recent explosion in AI technology has introduced a new, rapidly accelerating demand layer. AI-driven demand is anticipated to grow at a staggering 70% per year, with hyperscalers investing heavily in this space. By 2027, it is projected that generative AI will consume three-quarters of the global data center capacity.

The sector's attractiveness is further amplified by its high barriers to entry. The immense electricity requirements for new facilities pose a significant challenge, as existing power grids lack the capacity to meet escalating demands. Securing new power sources has become increasingly difficult, with waiting periods extending up to two years in key markets.

While 2024 will likely be looked back on as a year of transition for broader commercial real estate, encouraging dynamics position the data center sector as a crucial and resilient component of the digital economy, and is poised for continued expansion.

For more on commercial property sectors that have the highest conviction outlook, read our Mid-Year Real Estate Outlook.

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