06/01/18 Barron's Knowledge

Data Centers Take Center Stage in Real-Estate Investing

Data center image

Barron's Sector Focus: May 18, 2018 Evie Liu

Screen Shot 2018-05-21 at 2.24.33 PM

As 10-year Treasury yields have climbed past 3%, investors have started seeing the impact on the equity sectors known for high dividends, such as utilities and real estate. The Dow Jones U.S. Real Estate Total Return Index (DJUSRET) has fallen 5.5% so far this year, while the S&P 500 Total Return Index (SPXT) added 1.5%.

Does this mean real estate is a no-go zone now? Not if you know where to look, according to Burl East, portfolio manager of the $318 million Altegris/AACA Opportunistic Real Estate fund (RAAAX). In 2017, the fund outperformed 98% of its peers with a 23.6% return, according to Morningstar. The fund has a three-year annualized return of 8.9% compared to the peer group's 2.4%.

Barron's met with East to talk about his investment strategy and vision for the real-estate sector in a rising-rate environment.

He thinks investing is like creating a recipe: Find the right ingredients and keep them the same. His favorite four ingredients: properties that are in constant demand; types of properties that are offered by just a few companies; high barriers to entry for new players; and high barriers to exit for tenants.

East looks for real estate markets where landlords can demand higher prices because of low supply, and where tenants are essentially at a disadvantage. "We don't invest in fair-fight; we look for something as close to a monopoly as possible where the tenant is denied choice," says East.

For example, data centers—the gigantic warehouses that hold vast numbers of computer servers that store, process, and distribute data.

With booming technologies such as artificial intelligence, virtual reality, and machine learning, the world is seeing rapidly increasing demand for more data storage and stronger processing power. The Internet of Things (IoT)—interconnected smart devices that include AI assistants and autonomous cars—will also generate much more data than we could ever have imagined.

"An autonomous car will need 40 times more bandwidth than the cars we use today," says East. "The demand for data centers is growing 30% per year in the U.S. and 70% in China, but there are only six public companies in the supplier's market." They are: Equinix (EQIX), CoreSite Realty (COR), CyrusOne(CONE), Digital Realty Trust (DLR), QTS Realty Trust (QTS), and Switch (SWCH).

Data centers aren't easy markets to enter. It's not hard to purchase a piece of land to build the property, but the facility needs to be outfitted in fiber, equipped with interconnected networks, and wired for massive electric power and top-tier security devices. It takes about $1,000 to build one square foot of data center, said East, compared with the average cost of $300 for conventional real estate.

The industry is also very much driven by trust and reliability. The last thing companies such as Facebook(FB) and Alphabet (GOOGL) or government agencies such as the Securities and Exchange Commission and Federal Bureau of Investigation want to see is a data breach. This makes it almost impossible for new companies with no established track record or reputation to break into the business.

"We'll keep the number of particants small, make sure that nobody else joins the club, and that existing members don't overbuild," East says.

Another key part of the formula is the high cost if tenants to change their mind. Unlike an apartment or storefront, where tenants can simply move out when there's a change in market dynamic or pricing, it's very risky and expensive for companies to leave a data center given the amount of infrastructure investment there.

To East, all these factors above make data centers a perfect investing opportunity in real estate, where landlords can easily control the supply and dictate the price. Data centers make up 22% of his fund's portfolio.

Other properties sharing the characteristics he likes include wireless towers (American Tower REIT (AMT), Crown Castle International (CCI), SBA Communications (SBAC), lab space, infrastructure facilities, toll bridges, and airports.

Beyond that, East says real estate in general is still a safe haven for investors: "The real-estate sector has offered fantastic returns across a variety of cycles, it's a reliable wealth generator."

The sector is also a good hedge against inflation. "A lot of properties have CPI escalators built in the lease, so the return you get are real numbers but not nominal value."

What else does the sector offer? Stability. "There's no tech revolution and upheaval, no labor union, less regulations," says East. "The ocean is always the same here."

All Research Tags

$DFT $DRT 2021 Data Center acquisitions 2024 Data Centers 2103 data center acquisition report 350 E Cermak AI AI Data Center AI Data Center Boom AI Data Center Consulting AI Data Center Growth AI Data Center Site Selection AI Data Centers AI Growth AI M&A AI Real Estate AT&T AWS AWS Cloud AWS Columbus AWS Data Centers AWS data center Amazon Cloud Amazon data center Artificial Intelligence Data Centers Ashburn Data Center Market Atlanta Data Center Leasing Atlanta Data Center Market Azure BC Partners buying Centurylink data centers Barron's Data Center Real Estate Bitcoin Mining North Carolina Bitcoin Mining Power Rates Bitcoin Mining Washington Blockchain Business Continuity Buys Data Center Buys Data Center 2018 Buys Data Center 2019 Buys Data Center 2020 C7 Data Center CIO CIO Insight CIOForum CONE CONE REIT Sale CONE Sale COR CTO Carter Validus REIT Carter Validus sells data centers Centurylink Data Centers Centurylink buys Level 3 Centurylink data center business Centurylink selling data centers Chanos Cloud Cloud Computing Cloud Data Centers Cloud Spending Colocation Columbus Data Center Market CoreSite Coresite Covid-19 Cryptocurrency Mining Power Cryptocurrency mining space CyrusOne CyrusOne Acquisition CyrusOne Atlanta data center CyrusOne Bidder CyrusOne Data Center Atlanta Cyxtera Technologies DCRE DLR DLR buys DFT DRT Dallas Data Center Activity Dallas data center Data Center Data Center AI Data Center Absorption Data Center Absorption 2021 Data Center Acquisitions Data Center Acquisitions 2019 Data Center Acquisitions Report 2018 Data Center Activity 2018 Data Center Broker Data Center Brokerage Data Center Cloud Demand Data Center Consolidation Data Center Construction Columbus Data Center Consulting Data Center Covid Data Center Development Data Center Growth Data Center Investment Data Center Investments Data Center Investments 2020 Data Center Land Data Center Leasing Data Center M&A Data Center Market Data Center Market 2021 Data Center Market Research Data Center Mergers & Acquisitions Data Center Multiple Data Center News Data Center Power Data Center Purchase Data Center REITs Data Center Real Estate Data Center Real Estate Investing Data Center Rent Data Center Report Data Center Research Data Center Tax Incentives Georgia Data Center investing Data Center leasing report Data Centers Data Centers 2019 Data Centers 2020 Data Centers For Sale Data center absorption 2018 Data centers DataBank DataCenters# Databank DevOps Digital Bridge Digital Realty Digital Realty Trust Digital Realty Trust Atlanta Digital Realty Trust Chicago Digital Realty Trust Dallas Digital Realty Trust acquires Dupont Fabros Digital Realty Trust merger Digital Realty buys Chicago data center Digital Realty buys Dupont Fabros. Dupont Fabros Dupont Fabros merger Durham Data Center EQIX Enterprise Data Centers Equinix Equinix Dallas Equinix buys Infomart Equinix buys Verizon Data Centers F5 Networks Facebook Atlanta Data Center Facebook Data Center Ft. Worth Data Center GI Partners GOOGL Gartner Georgia Data Center Legislation Global Switch Google Google Cloud Google Data Centers HPC Data Centers High Performance Computing Data Centers Hyperscale Hyperscale Data Centers Hyperscale data center locations Hyperscale data centers Hyperscale growth IBM IBM data centers IPFS IRM data center expansion Infomart Infomart Dallas Iron Mountain Iron Mountain Data Centers Iron Mountain buys Fortrust Iron Mountain buys IO Data Centers KKR Level 3 MapleTree buys data centers Meta Columbus Microsoft Microsoft Cloud Microsoft Data Center Microsoft data center NOVA Data Center market NOVA Hyperscale Data Centers NXTVn New Chicago Data Center New Jersey Data Center Northern Virginia Absorption Northern Virginia Hyperscale Data Centers Nvidia Nvidia AI Data Centers Oracle Cloud Oracle data center Peak 10 Private Equity Data Centers Private equity data centers Public Cloud QTS QTS Data Center Atlanta QTS data center Redhat data center cloud Santa Clara Data Center Secondary Data Center Markets Sells Data Center Sells Data Center 2019 Sentinel Shaw Communications Switch Switch Data Center Atlanta Switch data center Atlanta T5 Data Center Atlanta Telefonica TierPoint TierPoint# Time Dotcom US Low Cost Power States US Power Grab US data center market report 2018 Vantage Vantage Data Centers Verizon ViaWest Virginia Beach Cable Landing Station Virginia Beach Data Center Park Virginia data center park Wall Street Journal Windstream Zayo ata center blockchain big data blockchain data center blockchain data storage blockchain file storage buys data center and colocation business buys data centers cloud data center cloud data centers data center data center acquisitions data center advisory data center broker data center consultant data center consulting data center for lease data center for sale data center investments data center leasing data center market data center market research data center news data center outage data center real estate data center sale leaseback data center sales data center tax incentives data center trends data centers data centers for sale delta data center delta outage dropbox data center emerging data center trends hybrid cloud north carolina data centers