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Growing Global Bandwidth Needs Driving U.S. Data Center REIT Transactions

Early 2016 Moves by Microsoft and Other Tech Firms Spotlight Growing Demand for High-Security Data Centers to Accommodate Complex 'Big Data' Requirements
June 8, 2016
QTS Realty this week acquired 101 Possumtown St. in Piscataway, NJ,, from Dupont Fabros for $125 million.
QTS Realty this week acquired 101 Possumtown St. in Piscataway, NJ,, from Dupont Fabros for $125 million.
Sensing huge growth potential, commercial property investors are rushing into the data center market in ever-increasing numbers as the dramatic rise in consumer and corporate demand for all things online drives the strongest returns for any REIT property sector this year.

Just this week,Overland Park, KS-based data center hosting and cloud services provider QTS Realty Trust (NYSE: QTS) said it will acquire its third data center property in New Jersey, a 360,000-square-foot complex in Piscataway, NJ, from DuPont Fabros Technology, Inc. for $125 million.

New Jersey is considered a key data center connection point for financial services, health care and technology companies in the Northeast. QTS purchased the 18-megawatt facility at an upfront cost per megawatt of below $7 million, which it said is significantly below the average cost of building new high-tech facilities in the New York/New Jersey market.

While the U.S. data center sector is growing rapidly, global demand for "big data" is driving staggeringly large transactions around the world. Two of the world’s largest data center developers, Equinix Inc. and Digital Realty Trust Inc., announced an agreement Monday in which Equinix will sell eight facilities across Europe for $874.4 million to Digital Realty. The buyer plans to fund the purchase in part by selling 12.5 million common shares. Digital Realty in turn will sell its Paris facility to Equinix for about $215 million.

The property moves are aimed at satisfying European Commission regulatory conditions for approving Equinix’s massive $3.8 billion purchase of London-based data center and colocation center provider TelecityGroup plc earlier this year.

Data center leasing volumes reached record levels in the first quarter of 2016 for data centers covered by research firm Jefferies, including Digital Realty, QTS, CoreSite Realty and CyrusOne, Inc., with first-quarter results revealing a combined $155 million of annualized revenue, 75% above the prior two-year average, according to Jefferies.

Those numbers are coming off of a huge 2015, where independent U.S. data centers alone raked in revenues of $115.3 billion with 6% growth, according to JLL’s 2016 Data Center Outlook.

"Primary data center markets near large metros are still seeing the majority of leasing activity," said JLL outlook author Lauren Picariello, director of industry research. "Most notably, Northern Virginia had over 60 megawatts of absorption in 2015. More D.C. area companies content providers and the federal government are looking for cloud hosting space in this market."

"However, demand for multi-tenant space is also growing in secondary and emerging markets as costs rise and space becomes limited," Picariello said.

The six data center companies in the FTSE NAREIT US Real Estate Index now boast a total market capitalization of $46.5 billion, according the National Association of Real Estate Investment Trusts (NAREIT). The companies have posted 30.3% growth in total returns year to date, including 14% growth during the current quarter - with returns eclipsing REITs specializing in every other commercial property type, from apartments and office buildings to logistics to hotels, medical facilities and self-storage properties.

Only the free-standing retail sector, at 22%, has even come close to data centers in total income growth through June 7. Another current hot property niche, self-storage, has logged just 3.8% returns growth since Jan. 1.

Even as data hosting becomes more expensive and complicated for public organizations and private companies, the vast majority of companies still maintain their IT infrastructure in house. Analysts say outsourcing those services to third-party multi-tenant data centers is still in its early stages, providing a potential runway for growth for the publicly traded data center industry.

Cloud services in particular is expected to continue its rapid growth, making up the bulk of new IT spending for companies this year as both large enterprises and smaller firms move increasingly from private cloud to third-party hybrid cloud deployment, according to data center executives and industry analysts.

Large telecommunications companies such as Verizon, CenturyLink, AT&T began to shed data center space last year, a trend expected to continue in 2016 as telecoms and other companies focus on their core businesses as data connectivity becomes more complex, according to JLL’s outlook.

The rise in multi-tenant demand will lead to accelerating consolidation this year, following up the largest data center M&A deal in history last fall, Digital Realty’s $1.9 billion acquisition of colocation provider Telx, JLL's report said.

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