Discussing Data Centers With JLL Valuation Advisory’s Stuart Miller

Stuart Miller is Senior Vice President and Data Center Lead for JLL Valuation Advisory. He leads a team responsible for valuations for secured lending advisory, portfolio valuation, financial reporting and purchase price allocations. Based in Dallas, he has more than five years of experience in valuation and consulting on data centers, with assignments for multiple Fortune 100 technology companies, investors, national banks, lenders and owner-operators.

MBA NEWSLINK: What is the general status and sentiment around the data center sector?

Stuart Miller

STUART MILLER: At a high level, the fundamentals of the data center sector remain strong, especially relative to other types of real estate, but rising interest rates have put downward pressure on valuations. The sector has grown in visibility over the past few years and has performed well, which led to significant compression in cap rates through 2020 and 2021, but it is undeniable the interest rate environment has lowered values in the sector.

NEWSLINK: What are the current rental rate and vacancy trends?

MILLER: In short, vacancy is decreasing and rental rates are increasing. The driving factors are, 1) continually growing demand for data center capacity and, 2) limited supply. Like in other sectors, COVID-19 and the resulting economic tumult hampered materials supply lines, and those effects are still lingering, with critical hardware delays of up to a year in some cases.

Further, in many of the largest markets, particularly the world’s largest data center market in Northern Virginia, utility providers are unable to provide adequate power to support planned data center development. This impacts availability of suitable land for data centers as well, where the largest data center markets are growing short on land with the necessary fiber connectivity, power availability, and legal entitlements for data center development.

As a result, the supply pipeline is struggling to keep up with the growing demand, and this has driven vacancy rates down while rental rates are rising.

NEWSLINK: Are you seeing any changes in the pool of investors and lenders active in the data center sector?

MILLER: Absolutely. A common theme in our work over the past 12 months is growing interest from new participants looking to dip their toes into the data center market. We are frequently engaged in conversations with investors and lenders seeking to better understand terminology, rates of return, valuation methodology, property taxes and whether it is appropriate to consider a business valuation.

This is borne out by the data too, Real Capital Analytics data shows that alternative sectors now account for a larger share of transactions volume than ever before, and data centers are a major driver of that growth.

NEWSLINK: How has the data center market been impacted by growing ESG concerns?

MILLER: Environmental concerns are a significant issue in the data center world, and it’s not hard to see why: these facilities consume vast amounts of water and electricity. Operators are always working to improve utility usage efficiencies as a way to lower operational cost, but the conversation has changed over the past several years as public awareness of environmental concerns has grown. Hyperscalers have made commitments to using 100% renewable energy by 2030 and have pledged to become “water positive.” Colocation operators like Digital Realty and Equinix have committed to renewable energy reliance and green building standards as a recognition that these are driving factors for their customers. Some of the largest investors have made ESG pledges as well, with environmental impact a criteria for investment decisions. It has become clear that in order to compete in the future, data centers will need to be sustainable. We expect these trends will continue. Developers will seek out locations with access to renewable power, operators will seek ways to reduce water and power consumption, and environmental sustainability will be a key driver of investment decision making.

NEWSLINK: ChatGPT and other kinds of artificial intelligence have become popular water cooler topics. How does artificial intelligence impact the data center sector?

MILLER: The ChatGPT trend over the past few weeks is further evidence of the growing need for data center capacity. Any artificial intelligence will have to be housed on a server somewhere, and the operator will need a data center to support it. Artificial intelligence, self-driving cars, the Internet of Things, TikTok–all of these underlie the fundamental need for data center capacity, and, thereby, the fundamental demand for data centers as an asset class.

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