Commercial Real Estate News / Buying / Tips for Buying Data Centers for Sale

Tips for Buying Data Centers for Sale

Published: 10-10-23 Category: Buying

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

Demand for data centers has been off the charts in recent years, with the data center market expected to grow 10.9% to $602 billion by 2030. This demand is largely driven by the continual digitization of the global economy and the large-scale adoption of resource-intensive computing applications, like AI.

This rising demand has caused data center pricing to increase, providing lucrative opportunities for commercial real estate investors looking to profit from the world of data center investing.

Here, we'll cover what investors need to know about buying data centers for sale. We'll discuss data center costs, profitability, and the state of data centers as commercial real estate investments.

Let's get started.

What Are Data Centers?

Data centers are a subcategory of special-purpose real estate that houses servers that store digital information and applications. Data centers form the foundation of today's heavily digital economy, as many businesses store their information in some kind of physical data center. Data centers, in turn, allow companies to access and share data through their networks.

To that end, data centers contain all kinds of specialized computing equipment, like servers, hard drives, networking cables, and storage drives. Data centers also include specialized cooling systems to keep operating hardware at optimal temperatures.

Investing in Data Centers for Sale

If you're looking to invest in data centers, you have two main options: The first is to invest in a data center REIT, which are specialty REITs that provide investors with a a way to invest in commercial space without incurring the difficulties of buying a data center property of their own and dealing with a potentially illiquid asset.

The second option is to buy or build a data center. This will take more time and money but often yields better potential returns: You'll be able to operate your own data storage company and lease your data center server space to companies and other third parties. Monthly data storage rents in the US recently hit an all-time high of $150 per kilowatt.

What's the Average Cost of a Data Center?

Data center costs depend on whether you're buying an existing center or building a new one. The cost of buying data centers for sale varies depending on the state, building location, and whether computing equipment is included. A medium-sized data center will cost at least $10 million to buy outright.

Whatever your plan is, we highly recommend working with a commercial real estate broker and assembling a well-vetted investment team. Brokers who specialize in data centers understand which types of properties are ideal investments and can provide general commercial real estate advice. They can also help negotiate any data center sales contracts.

Costs of Building a New Data Center

Building a new data center will often require more in the way of time and money, as you'll have to finance land and construction costs. A 2017 report from the Chamber of Commerce lists a breakdown of the average costs of building a new data center:

Land Acquisition: $3.4 million;
Construction: $45 million;
IT Equipment: $157 million;
Power (per year): $7.4 million; and
Staffing: $2.8 million.

Another source states that building a data center costs about $10 to $12 million per megawatt of power. Additionally, the typical data center can expect to spend about $7 million per year on maintenance and upkeep. All of this is to say that building a new data center is very expensive and will require access to a lot of liquid capital.

Who Buys Data Centers?

Private equity firms are overwhelmingly the most active buyers and financiers of data centers. In 2022, private equity groups oversaw about 90% of data center mergers and acquisitions for more than $44 billion. The single largest data center move in 2022 was KKR's $15 billion acquisition of CyruOne.

Other major buyers of data centers include large companies that deal with high amounts of data or offer proprietary software applications, such as Amazon and Microsoft.

How Profitable Is a Data Center?

Data centers are often secretive with their financials, so it's difficult to find exact data on data center profitability. According to Statista, total US hyperscale data center revenue was $88 billion in 2022. Given that the US has about 280 hyperscale data centers, that comes out to an average of about $315 million in revenue per data center.

These numbers are just estimates, but they sync well with the 2017 Chamber of Commerce report that pegs average annual data center output at $243 million.

Data centers generate a lot of revenue but spend an average of $10 to $25 million annually in operating costs. The typical data center will spend more than 40% of its operating budget on equipment and software maintenance/repair.

Are Data Centers a Good Investment?

Investing in data centers has its pros and cons. Data centers are extremely expensive to build and run, but they're also in high demand because they practically form the backbone of today's modern digital systems.

Demand for data centers is also currently surging across the globe due to the prevalence of remote work and streaming services. The advent of AI technologies also means there will be a growing market for neural AI data centers to store and process AI resources. However, data centers are seeing competition from cloud systems, which could affect data center growth.

A data center would not make a good first-time commercial real estate purchase, but an experienced investor who is familiar with buying commercial property and knows the IT/computing industry can create a sustainable model and meet a pressing technological need.

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