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### Shaping the Future of Data Center Financing with AI

Julie Brewer of EdgeCore Digital Infrastructure explores the evolution of data center financing wit…

Although data centers have existed for over two decades, it is only recently that the real estate investment sector has started acknowledging their significance. Julie Brewer, the Senior Vice President of funding at EdgeCore Digital Infrastructure, asserts that data centers are currently the most favored and attractive asset group in commercial real estate, experiencing faster growth compared to other asset classes.

While data centers have a history of more than 20 years, the real estate investment community has only recently begun to take notice of their potential. They are currently the most popular and appealing asset group in commercial real estate, growing at a faster rate than many other asset classes, as stated by Julie Brewer, the Senior Vice President of funding at EdgeCore Digital Infrastructure.

Approximately fifteen years ago, the involvement of commercial real estate investors and lenders in the data center sector was limited. However, both parties are now becoming more acquainted with the industry. The demand for capacity continues to surge, leading to record-high private equity investments projected for 2022 and 2023.

Navigating the challenges associated with securing debt financing is becoming increasingly crucial as the demand for data center expansion rises. Achieving a balance between debt financing and equity investment is paramount in the era of AI, considering the heightened expectations from buyers, local communities hosting data centers, and stakeholders focusing on ESG (environmental, social, governance) and sustainable business practices. Data center developers must make intentional decisions when selecting the optimal capital structure to cater to design requirements and meet specific capacity demands of customers.

Key Considerations in Data Center Leasing

Investing in commercial real estate can be relatively straightforward, given the ongoing demand for power and the continuous expansion efforts by providers and private investors who support the evolving capabilities.

The economics of data centers are influenced by construction costs, leasing rates, availability of financing, and asset valuations. Data centers stand out from other commercial real estate assets due to their heightened energy and cooling requirements, presenting a unique learning curve for lenders. As the appetite for substantial data center capacity among consumers grows and investors and lenders become more comfortable with the sector, data centers have emerged as a critical player in commercial real estate, with the pool of available capital continuously expanding.

Adapting to Industry Transformations

The latter half of 2023 witnessed a significant uptick in debt financing activities, with the momentum continuing unabated. Despite the increased risks and costs associated with the current investment landscape, the demand for power remains at historic levels. The information center space continues to have access to loan markets, despite prevailing interest rates and pricing pressures.

Data centers are an attractive destination for capital investments due to their unique fundamentals. Long-term contracts and high-credit tenants offer appealing investment prospects. The challenges associated with client migration and substantial tenant investments further attract capital to the sector.

Establishing and maintaining strong relationships with lenders is critical, especially as the industry matures and experiences rapid growth, despite the current volatility in capital markets. Strong lender relationships are essential for data center providers to navigate the evolving loan market landscape and access capital as needed.

For more insights, refer to the Future of Data Centers and Emerging AI Technologies.

Emphasizing Sustainability in Fundraising Efforts

Lenders and investors seek to ensure that power supply is accessible and utilized efficiently to support data center developments and operators’ commitments to sustainability. Securing land and reliable power sources for robust campuses is essential. Collaborating closely with utility companies underscores the importance of data centers in ensuring a secure power supply for all facilities.

Debt financing and private investment activities underscore the importance of understanding sustainability for all stakeholders, including lenders, investors, providers, local communities, customers, and regulators. Focusing on initiatives that expand the pool of potential consumers and designing facilities with efficiency standards in mind are crucial steps in this direction.

Facilities and campuses should be constructed with these standards in mind, offering valuable tax incentives to companies, developers, and customers. Green building requirements also influence project selection. The financial sector recognizes the significance of sustainability, with green bonds gaining popularity for their alignment with environmental goals and contributing to the demand for a more sustainable environment.

Stakeholders, including customers, lenders, investors, and local communities hosting data centers, are increasingly focused on green operations, facilitated by various tools. Power Purchase Agreements (PPAs), for example, involve purchasing electricity and generating renewable energy credits (RECs) from projects. Securing sustainable energy sources is essential for continued growth and expansion while meeting market and customer demands.

Impact of Artificial Intelligence

Understanding how data centers are evolving in the financing and commercial real estate realms is crucial, as AI continues to influence various industries, including data centers.

AI’s reliance on graphics processing units (GPUs), which consume over three and a half times the power of conventional central processing units (CPUs), necessitates larger and denser data centers. Unlike cloud data centers that gradually scale to meet power demands, AI requires upfront power allocations to fully leverage GPU clusters.

For instance, the current 100+ MW AI-driven structures are two to three times larger than the largest cloud data center structures from 2015. These significant structures were unheard of a few years ago, surpassing the largest organizational data centers in 2007 and dwarfing those from 1999. The AI-driven demand for Nvidia hardware has reshaped data center requirements, prompting a generational shift in size, density, and strength.

Designers preparing for the next wave of data center needs in terms of size, density, and power may be best positioned to support AI technology requirements.

Factors Shaping the Future of Data Center Financing

The rapid evolution of data centers as an asset class will necessitate innovative approaches to equity investment and borrowing. Developers may need to design and construct facilities, acquire land and power resources to support future growth, and secure funding to meet evolving requirements and sustainability standards. As AI drives an increased demand for power, new methods for securing funding, such as construction costs, asset valuations, lease rates, and more, will be essential to support the next generation of data centers.

How is AI revolutionizing data center financing? Why is sustainability critical for investors? Share your thoughts with us on Facebook, Twitter, and LinkedIn. We look forward to hearing from you!

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Last modified: February 22, 2024
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