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01/21/19 Five 9s Digital Research

2018 DATA CENTER REAL ESTATE ACQUISITIONS REPORT - YEAR END


Data center acquistions 2018

Data center real estate acquisition activity for the full year of 2018 yielded approximately $3.089 Billion of data center real estate transactions totaling 8,055,356 SF. In comparison, full year 2017 total activity totaled $2.742 Billion and 7,496,075 SF of space.

Pricing

Interest rates peaked to the highest level over the past 5 years and continued the trend of ending the year at a higher level when compared to the beginning of 2018. We expect a similar pattern for 2019 with debt for acquisitions and development becoming more expensive by year end. 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 be relatively flat for 2019. For good quality data center assets with long term leases we expect a 6.5%-7.25% cap rate 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.

M&A

While the number of significant data center M&A deals climbed to 68 in 2018, approaching an aggregate value of $16 billion, the total value of deals dropped when compared to 2017. While their were 5 deals that each were greater than $1 billion that occurred in 2018, none came close to the Digital Realty and DuPont Fabros or Equinix and Verizon deals from 2017. The largest M&A deal in 2018 was a group of Asian investors purchasing a 25% stake in Global Switch valued at $2.8B.

Trending

As in prior years, we continue to believe large corporate-owned facilities remain underutilized and corporations continue to transition workload to 3rd party data center operators. Quality data center operators, such as the data center REIT sector and strong privately held operators with multiple locations, stand to be the biggest beneficiaries of this trend as the corporations work to minimize Capex and Opex, right-size the use of the facility, and can become a customer in the facility.

Corporations continue to evaluate selling their data center assets and leasing back a portion of the space from a data center operator. The corporate owner can often achieve higher pricing for the asset than selling as a fully vacant facility and benefit by keeping its IT in place in the same facility by becoming a customer of the data center operator. The 2018 Bank of America sale-partial leaseback transactions in Texas and Arizona are examples of these types of transactions which continue to be seen on a more regular basis.

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