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Data Center REITs

How data center REITs lease server space and power to cloud and enterprise tenants, and why electricity access limits growth

What data center REITs own

Data center REITs own large, specialized buildings built to house servers, storage systems, and networking equipment. Unlike an office building, the value of a data center lies mostly in its power supply and redundancy, cooling systems, physical security, and network connectivity rather than interior finishes. Data center REITs generally operate under one of two models, or a blend of both: wholesale, where a large tenant leases an entire dedicated facility or a very large portion of one, and retail colocation, where many smaller tenants share space within the same building. Equinix and Digital Realty Trust are the two largest publicly traded, pure-play data center REITs, both operating large global portfolios of these facilities.

How they make money

Data center REITs lease raised-floor space, power capacity, and equipment cabinets or cages to tenants ranging from large cloud and hyperscale computing companies to enterprises and network operators. Large wholesale tenants often sign long leases spanning many years, similar to net lease REITs in other sectors, while smaller colocation customers may sign shorter agreements. Facilities are typically built with redundant power feeds, backup generators, and battery systems so that operations can continue through a utility outage, since reliability is one of the most important things tenants pay for. Many facilities also generate interconnection revenue, charging tenants for the ability to directly and securely connect their networks or equipment to other companies' equipment within the same building — a service that becomes more valuable to tenants as more networks are present in one location.

What drives demand

Growth in internet traffic, cloud computing adoption, and enterprises outsourcing their own IT infrastructure have driven demand for data center space for years. Streaming video, online gaming, and other high-bandwidth consumer services have also contributed to rising data traffic over time, alongside enterprise adoption of software delivered over the internet rather than run on a company's own on-site servers. More recently, computing workloads tied to artificial intelligence have added a further source of demand, since training and running large AI models requires substantial, power-dense computing capacity concentrated in relatively few facilities.

Key risks

Data centers are expensive to build and require large, reliable supplies of electricity, so access to power — and its cost — has become an increasingly important constraint on new development in many markets. In some of the most established data center markets, suitable land and available power capacity have both become scarce, and new projects can face lengthy utility interconnection queues or local permitting and community opposition, all of which can slow the pace of new supply even where tenant demand is strong. The sector also carries meaningful tenant concentration, since a relatively small number of large hyperscale cloud customers account for a significant share of demand, and some of the largest tenants have the scale to build and operate their own facilities rather than lease, which is a competitive consideration for landlords over the long run.

Metrics that matter

Data center leasing is often measured in megawatts of power alongside square footage and dollars, since power capacity, not just physical space, is frequently the binding constraint on how much a facility can lease. Other closely watched figures include the backlog of signed-but-not-yet-commenced leases, renewal rates, and same-store net operating income growth. Renewal pricing is also closely watched, since data center leases that were signed years earlier sometimes roll over at different rates than current market pricing, depending on how supply and demand have shifted in that specific market since the original lease was signed. Cap rates are also relevant when evaluating acquisitions and development yields in the sector.

How this compares with infrastructure REITs

Data centers are sometimes discussed alongside cell tower and communications infrastructure REITs, since both sectors benefit from growth in the digital economy. But the assets, tenants, and operating models are quite different: towers lease physical space on a structure to wireless carriers, while data centers lease space, power, and connectivity to computing and networking tenants. Some data center operators also lease raw land or shell buildings to large technology companies that then fit out and operate the space themselves, a variation on the standard leased-and-operated data center model. Current data center REITs are listed on the data center sector page; the glossary defines related terms, and the sectors overview covers the rest of the series.

See it in the data: Data Center REITs →

Research and education only — nothing here is investment advice. Figures such as the 90% distribution rule are general and can change; always confirm against a company's filings.