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01/15/18 Five 9s Digital Research

2017 DATA CENTER REAL ESTATE ACQUISITIONS REPORT - YEAR END


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Data center real estate acquisition activity for the full year of 2017 yielded approximately $2.742 Billion of data center real estate transactions totaling 7,496,075 SF. In comparison, full year 2016 total activity totaled $1.699 Billion and 6,207,737 SF of space.

Both single-tenant and multi-tenant data center assets drove activity in 2017 with several corporate data center sale-leasebacks and partial leasebacks adding a considerable amount of activity to the mix. Data center assets in the major metropolitans will continue to be pursued by the institutional, private equity and international investors with additional activity anticipated in the strong Tier 2 markets. We anticipate more corporate data center dispositions in 2018 with most transactions including a leaseback component.

Pricing

As we transition into 2018, we anticipate a rising interest rate environment. Debt for acquisitions and development will become more expensive. Although we have seen gradual cap rate compression in the data center real estate sector over the past several years, we anticipate cap rates to flatten due to rising interest rates. Over the next year, we anticipate good quality data center assets with long term leases to trade in the 6.5%-7.25% range pending overall lease dynamics, asset quality and market fundamentals. Data center assets with shorter term leases, multi-tenant occupancy and lack of clear tenant credit are estimated to trade in 7.25%-8.5% cap rate range with various factors that may affect the swing outside of these parameters.

Tax Bill

The new 2018 Tax Bill will benefit the overall commercial real estate (CRE) sector and help offset the rising interest rate environment. The new tax code preserved and improved most of the existing tax breaks for CRE investing. The 1031 exchange provision remains intact and and commercial property landlords will still be entitled to a full mortgage interest deduction, in addition to favorable treatment of pass-through income.

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