While industrial warehouses for storage and distribution of goods have grown in recent years to satisfy the insatiable American online shopper, another form of warehousing has steadily grown in demand as well: data centers. Simply put, a data center is a building (or buildings) dedicated to the housing of computer systems, such as servers, other data storage systems and networking equipment.
As the commercial real estate (CRE) industry looks for new investment opportunities, data centers are likely to continue playing a significant role. The current generation of data centers has quickly become a multi-billion-dollar industry not just in the United States, but worldwide. However, it’s imperative to understand the scope of what these projects entail. In this blog, we’ll explore why the need for data centers has increased, the opportunities and challenges they bring developers and investors, and significant title insurance factors to consider.
The Current Landscape
Although data centers can be traced back to the mid-1900s (remember mainframes?), the demand for data storage has skyrocketed in recent years, due to our growing reliance on cloud-based data solutions and everyday use of artificial intelligence (AI). In particular, there has been a substantial increase in the construction of colocation centers (data centers leased to a third-party tenant) and hyperscale data centers (massive facilities engineered for large-scale workloads with an optimized network infrastructure, streamlined network connectivity and minimized latency).
According to JLL1, consumers and businesses are expected to generate twice as much data in the next five years as all the data created over the past 10 years combined. It’s estimated that the five-year compound annual growth rate (CAGR) for global colocation megawatts will reach 15.2% by 2029.
Key Considerations
There are several key factors that developers and investors should consider before initiating a data center project. These include:
- Location. As with most businesses, tangibles such as physical accessibility, property values, labor costs and availability must be considered. For data centers, it’s also important to factor in jurisdictional weather concerns and how close the facility is to major markets to provide smooth data transmission.
- Infrastructure. The cost of constructing a data center is substantial, given their intense power, data communication and equipment needs, not to mention the physical space that is necessary. A data center will also require a sophisticated cooling system to offset the heat generated by operating equipment, ensuring that temperatures support optimal performance of computing infrastructure. That said, it is not unusual for construction costs to fall in the hundreds of millions of dollars, with as-built values often exceeding $1 billion.
- Utility availability and cost. In the U.S., there are roughly 2,500 data centers with approximately 50 percent located in the primary markets of Northern Virginia, Phoenix, Dallas, Atlanta, Chicago, Northern California (Silicon Valley), Portland (Oregon), New York, New Jersey, Seattle and Los Angeles – mainly due to their proximity to major power grids, reliability of the power source and cost.2 However, the popularity of secondary markets like Austin, Boston, Charlotte, Columbus (Ohio), Denver, Houston, Kansas City, Las Vegas, Miami, Minneapolis, Salt Lake City and San Antonio have also grown, as data center developers look for solutions to support increasingly strained power grids in primary markets.
- Tax incentives. Some states offer tax incentives, such as sales and use tax exemptions on equipment and electricity, for the construction and operation of data centers built within certain parameters. Certain jurisdictions have regulations that are more friendly to data center development.
- Title insurance underwriting requirements. Like any new development project, underwriting the mechanic’s lien risk in conjunction with state law will be a large consideration, magnified by high as-built values and large construction loans. Additionally, large tracts of land are often subdivided concurrently with the start of development or loan being insured. Utility access and contiguity of the property to utility easements and rights-of-way will also need to be carefully considered, given the importance of these services to data center operation. The expertise of an experienced commercial title underwriter is needed to successfully navigate these and other complex title matters common to data center transactions.
Challenges
Developers and investors should also be aware of potential challenges associated with data centers.
- Power outages. Because data centers demand very high levels of energy, they can tax older power grids, leading to outages and increased prices for customers.
- Noise pollution. Noise levels emanating from a data center can be substantial depending on the equipment being housed.
- Sustainability. With increasing international interest on the subject of sustainability, there are initiatives in the CRE arena for data center projects to responsibly adopt technologies that help reduce water consumption, electronic and toxic waste, and greenhouse emissions.3
- Land use restrictions. Land use is also a perennial concern of environmental activists and residents living near data centers. For example, Virginia has generally been considered an excellent location for the development of data centers because of its network connectivity and low cost of power. However, not everyone has been keen on seeing large parcels of land converted into massive colocation centers.
In January 2024, a group of residents formed their own non-profit to block a technology park of nine data centers from being built in the town of Bristow, Virginia. They argued that the development violates Prince William County’s Code of Ordinances because it constitutes invasive industrial use within a residential area.4 The data center park had already been facing backlash over its potential impact on the community since it was proposed roughly two years prior.
As of 2024, Virginia lawmakers have introduced new legislation (at both the state and county levels) to address data center development taking place there. The proposed legislation runs the gambit, from banning diesel backup generators, prohibiting projects near historic areas and removing by-right zoning for data centers. While these laws may never pass, support for them can make the development of additional data centers much more difficult. It is plausible that other states could follow in Virginia’s footsteps, if and when their markets become a new hot spot for developing data centers.
Conclusion
The need for data storage solutions will only continue to grow as technology drives innovation, turning data centers into an increasingly coveted CRE asset class.
As with any CRE transaction, it is vital for real estate developers and investors to perform due diligence before committing to any project. Meticulously assessing the unique variables associated with data centers can help developers and investors make informed decisions about their investment. It is also essential to retain the services of a reputable title insurance company to confirm property ownership, identify potential liens and protect property owners from unforeseen title concerns.
At Old Republic Title, we understand what it takes to navigate complex CRE transactions. Our National Commercial Services Team is ready to assist developers and investors with all their title and closing needs. To learn more about Old Republic Title’s title insurance products and closing services, visit oldrepublictitle.com/commercial/ncs.
Old Republic Title, its officers and employees do not provide, and this communication is not intended to be, investment, tax or legal advice. Old Republic Title makes no representations or warranties regarding the accuracy of the information or tax consequences addressed herein. You should consult an investment, tax or legal professional of your choosing to advise you of the benefits and risks of your specific transaction.
Sources:
1 jll-data-center-outlook-global-2024.pdf
2 https://dgtlinfra.com/united-states-data-centers/
3 https://www.techtarget.com/searchdatacenter/feature/Assess-the-environmental-impact-of-data-centers
4 https://www.bisnow.com/national/news/data-center/we-need-to-be-careful-a-wave-of-data-center-legislation-in-virginia-is-creating-uncertainty-for-developers-123257