Monday, March 4, 2024

"AI is fueling a gold rush in new data centers, the hottest buildings in real estate"

If you recall this is an industry Jim Chanos singled out as a short a couple years ago.

He was shorting the REITs due to competition from Amazon and the other giant cloud services. He was half-right on the thesis but then, boom

Chanos was short data center REITS Digital Realty Trust (DLR, blue line) and Equinix (EQIX, Black OHLC) vs S&P 500 (gold line):

So over the last year one matched the S&P 500, the other was running about 13 percentage points ahead. And now, if he is still short the group, he faces the worst possible news. February 26

Palo Alto Networks surges as Nancy Pelosi discloses purchase

And the headline story from MarketWatch, March 1/2: 

Forget glitzy skylines, the new bright spot in commercial real estate is workforce housing for computers that can whirl data into artificial intelligence

Instead of snazzy hotels or glistening office towers, the new property darlings are power-hungry data centers, often in places like Northern Virginia; Columbus, Ohio; and Salt Lake City.

Traditionally box style, these buildings are all about function: A place for racks and racks of computers to be stacked up high, kept cool, and girded for the boundless stream of images, videos, chats, text, internet searches and the digital detritus of our lives. 

Their goal isn’t merely to contain, host and sort data billowing from computers and smart devices, but increasingly to provide a place where machines can learn from it.

“Everything is AI right now,” said Sean Farney, a veteran of the data-center industry and a vice president of data center strategy at real estate firm Jones Lang LaSalle. “The most immediate impact is this huge, new organic demand for hosting the tech that makes AI work.” 

Farney, who helped Microsoft Corp. 15 years ago open a 120-megawatt data center in Chicago, one of the largest at the time, said the release of ChatGPT in late 2022 marked an industry turning point.

It galvanized Microsoft MSFT , Google parent Alphabet Inc. GOOG , Meta Platforms Inc. META and others to more quickly deliver their own artificial intelligence products. It also added to a gold rush in what had been a niche area of commercial real estate, an otherwise battered sector, especially when it comes to office buildings.

Power-hungry AI
ChatGPT, which reached an estimated 100 million monthly users in its first two months, can generate text, images and more. Enthusiasm on Wall Street for all things AI provided rocket fuel to shares of chip-maker Nvidia Corp. NVDA and other “Magnificent Seven” tech stocks.

Server maker Super Micro Computer Inc. SMCI has been among the latest stocks to benefit. And AI also has a hyper-focus on real estate that can handle the boom.

“It’s already past being niche,” said Patrick Wilson, a portfolio manager who has specialized in data centers for more than a decade at global real-estate investors CenterSquare Investment Management.

Wilson said a wildcatting approach to new supply, in the past, would “shoot landlords in the foot,” but that pricing power has clearly shifted in favor of data-center owners in the wake of the pandemic.

Companies in recent years have been vying to lease space at data centers in primary markets like Northern Virginia, with demand spilling into secondary and up-and-coming markets like Central Ohio, where Inc. has a $7.8 billion development in the works....