01/11/24 Wall Street Journal Knowledge

New Data Center Property Investment Signals AI Boom

Vantage data centers santa clara

Two investment firms are buying stakes in Vantage Data Centers for a high valuation

One of the world’s largest data-center developers is getting a $6.4 billion equity infusion, the latest sign that this property sector is booming alongside the rise in artificial intelligence.

Vantage Data Centers plans to use the capital from digital infrastructure investor DigitalBridge Group and Silver Lake, a technology investment firm, to add more than 3 gigawatts of capacity globally. That is enough to power more than 2.5 million homes.

Vantage already has 32 data-center campuses on five continents. Its expansion is in response to growing AI demand from tech companies such as Microsoft, Google, Oracle and Amazon Web Services. The new capacity will cost about $30 billion, including debt, company officials said.

“Arguably [AI] has been the fastest adopted business technology in history,” said Sureel Choksi, Vantage’s chief executive. It has sparked “an arms race between all of the world’s leading tech companies.”

Data Center Fiber Optics Vantage

The $6.4 billion equity raise increases Vantage’s global valuation to more than $15 billion, according to people familiar with the matter.

The data-center industry, which provides the buildings that house the internet, went into full throttle mode last year as millions of individuals and a range of businesses began adopting artificial-intelligence tools. Because of its complexity, AI computing such as OpenAI’s ChatGPT puts much higher demands on data-center power and cooling compared with other technology.

Before the AI boom, large deals in the data-center industry would be for single locations that provided 20 to 50 megawatts in capacity, Choksi said. In the past year, Vantage has started to see deals with tenants in the 100- to 500-megawatt range “that are specifically in support of AI on a dedicated basis for customers,” he said.

Companies in North America leased 2.4 gigawatts of data-center capacity in the first three quarters of 2023, and that figure will likely hit or surpass 3 gigawatts for the full year, according to datacenterHawk, a data, research and consulting firm. That is up from 2.3 gigawatts in all of 2022 and 1 gigawatt in 2021, datacenterHawk said.

This high demand fueled data-center rent increases last year in the low double digits, up from the high single digits in 2022, said David Guarino, an analyst with real estate analytics firm Green Street. Data-center operators are indicating that this year will be just as strong as 2023, Guarino said.

The strength in data centers contrasts with other commercial-property sectors, which are suffering declining valuations because of high interest rates. Some also face sector-specific issues, such as remote work in the office industry and online shopping’s competition with malls.

While high interest rates also are hurting data-center values and increasing borrowing costs, higher rents have more than made up for it.

Big investment firms participating in the data-center boom include Blackstone and PGIM Real Estate. Shares of real-estate investment trusts focusing on data centers rose about 30% in 2023, compared with a REIT industry average of about 10%, according to Green Street.

Vantage Data Center

Both DigitalBridge and Silver Lake have a history with Vantage. Boca Raton, Fla.-based DigitalBridge already is a lead investor in the data-center company through its digital infrastructure funds. Silver Lake, based in Menlo Park, Calif., and New York, founded Vantage in 2010 with an eye toward meeting the growing data-center demand from cloud-computing businesses being built by technology companies.

Silver Lake sold Vantage to a group led by DigitalBridge in 2017 in a deal that valued Vantage at about $1 billion, according to people familiar with the matter. Over the next seven years, DigitalBridge expanded Vantage from just locations in Silicon Valley and Washington state to 19 markets with demand fueled by the growth of cloud computing.

“There’s tremendous growth in this biz to support broad digitization,” said Jon Mauck, a DigitalBridge senior managing director. “We don’t require every company to adopt AI to be successful.”

Lee Wittlinger, a Silver Lake managing director, said his firm decided to renew its investment in Vantage after recognizing the importance of AI to all of Silver Lake’s portfolio companies.

“All of them have some AI-enabled application, either opportunistically or defensively,” he said. “It’s an imperative.”

Data-center operators still face obstacles to their expansion plans. Technology industry veterans and government officials have expressed concern about the potential dangers of AI, such as its risk to privacy and job security. Some call for delaying growth.

Electricity shortages have also surfaced in some of the most desirable locations. The shortfalls raise questions about whether power-hungry technology will be able to expand at the rate companies want, even if they are unfettered from regulations.

Vantage said it has no immediate concerns about land or power shortages for the next few years because it has sufficient land and is partnering with local utilities to add the more than 3 gigawatts it currently is planning. People involved with the company also believe that the robust demand they are anticipating won’t be affected by any restrictions imposed on AI.

“Irrespective of all the concerns being raised, I think the genie is out of the bottle on AI,” Wittlinger said.

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