With local pushback surging, data centers are a tricky commercial deal
One commercial real estate sector that has gotten more attention in the media than any other recently has been data centers.
As the demand for artificial intelligence has increased, so has the demand for large data centers to be able to handle the computing power necessary to fuel this new technology.
However, in recent months, the topic of data centers has become increasingly contentious in both metropolitan areas and rural communities. The pushback against these large facilities is almost a daily headline on any local news station.
Some of the anger surrounding these centers has become violent. On Monday, someone fired shots at the home of an Indianapolis council member who recently supported rezoning an area for a data center.
It’s not just the community pushback that is causing issues with this commercial sector. One veteran commercial mortgage broker said the concern with what might happen to the facility if the need for these data centers decreases in the future is also giving investors pause.
Marc Tropp (pictured top), senior managing director with Eastern Union, said in his area, data centers are popping up everywhere.
“In Virginia, data centers are a big deal,” Tropp told Mortgage Professional America. “You’ve got the government out here that needs it. You have Amazon headquarters out there, and the big demand that comes from that.”
Finding a secondary usage
The problem with these data centers from a commercial standpoint is that there are still a lot of unknowns about the future of these facilities. Historically, as computing technology has progressed, it has gotten a lot smaller.
So brokers who are working on these deals have to figure out what may happen to the building if a large data center either isn’t needed or doesn’t need as much space in the future.
“What's the secondary play if you have 200,000 square feet of data center, and five years from now, they only need 50,000?” Tropp said. “One of the things that the banks look at is, ‘What's that secondary conversion? Can it go to warehouse? Can it go to office? What's the cost of it?’
“There's one here that I think is two buildings. The first building built was a full data center. The second building was built, and they didn't need the second building. A large regional moving company ended up taking the entire building. Being able to have that secondary opportunity to lease it up, other than data, is important.”
With all real estate, location is critical. It’s even more critical when it comes to data centers, because there are concerns about where these are being built.
“I have to look at what's happening in the area,” Tropp said. “If we're going to build in the middle of nowhere, then there's really nothing to do with it. It's data, and that's it. But the closer you can get to some more population, and in a few years from now, I don't need that much space for that anymore, I can convert it. That's going to be the play.”
Finding the right location
It is the data centers that are being placed near residential areas that are currently seeing pushback from local communities. But Tropp notes that it’s a tricky situation finding the right location. Not only are there concerns about future conversions, but there is also the cost of bringing the large amount of electricity needed to power these centers.
“What we're seeing now, because of the demand and the cost to drag out utilities, it's the counties themselves that are sort of restricting how far they're going to go out,” he said. “I think you're going to start seeing that nationwide, because it is very, very expensive. The big talk is electricity costs. That leads the conversation with regard to the banking and in the counties themselves.
“How far out are you going to be able to drag these massive electrical lines for this to happen? It's costly, and if it doesn't work out, you just spent all that money. You're not getting any return on that investment from a county's perspective.”
It is going to lead to conflicts because residents don’t want a data center in their backyard, and counties and cities don’t want to pay the money to move these data centers into rural areas. For commercial brokers working on data center deals, it’s another factor that could make or break eventual financing.
“So here we’re starting to see the county saying, ‘We got to figure out how far we're willing to go,’” Tropp said. “I think that's actually what's going to lead the data development space, over the short term. It's more just bringing out an electrical line. They’re bringing a massive wattage, and they put power stations in as well.
“If it's not already there, it's going to be tough to get into the county to do it in the middle of nowhere. If you could tap into something relatively close, it's much easier. But for them to go and invest county funds into putting it out there, that far away from somewhere that could be a development site down the road, I think that’s going to be tough.”
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