State Of REITs: Distress Brings Opportunity (Copy)
Among the top-performing property sectors this year, the Data Center REIT rebound has been fueled by reports of "booming" demand for artificial intelligence ("AI") focused data center chips.
Even before the Nvidia report, Data Center REITs were on the upswing in early 2023 after an impressive slate of earnings results showed improved pricing power and record-high occupancy rates.
Ironically, this AI-wave comes just as Data Center REITs became a trendy “short” idea centered on a thesis of weak pricing power and competition from the "hyperscalers" - Amazon, Google, and Microsoft.
A confluence of development bottlenecks - power shortages, higher cost of capital, supply chain constraints, ecopolitics, and NIMBYism - have created a more favorable dynamic and swung the pendulum of pricing power towards existing property owners.
Barriers to supply growth combined with AI-accelerated demand should bring some sustained pricing power to a sector long-burdened by near-unlimited supply. With negotiating power tilting back towards landlords, there appears to be enough economic value to be shared.
