Server farms create huge real estate opportunities

Jay Epstien Photo: Israel Hadari

DLA Piper Co-Chair Global Real Estate Jay Epstien says that server farms have similar characteristics to income producing property.

One of the prominent trends in the tech world today is the growth in the quantity of data: more devices connected to the Internet, creating more information and data, which needs to be stored and analyzed. The large amount of data being collected alongside the development of artificial intelligence (AI), which consumes computer capabilities and the move to the cloud, and leads to the construction of more and more server farms (data centers).

Server farms are composed of many servers that together create major computing and storage capabilities. These installations can grow in size to cover tens of thousands of square meters. The transition to cloud, for example, involves in fact storing the information in one of the server farms - let's say Facebook or Google - instead of storing it in our personal computer. Although it seems to us that the technology allows us to save in real estate and cuts us off from the physical world, this is only partly true. It does indeed let companies reduce their server rooms, or even completely forgo them, but there is still the need for a great deal of real estate in order to build the server farms that replace them.

Setting up a server farm can be undertaken in several ways: huge companies - for example social networks - build server farms for themselves, which store the information on their platform. Companies like Amazon and Microsoft offer storage space in server farms for any company that wants it, from small startups to enormous companies, and server farms have been set up by smaller companies that offer storage space to other companies.

Generally speaking, this subject is not linked to real estate but in order to set up a server farm, there is a need for a great deal of land. Another model - in which the huge resource-rich companies are not involved - sometimes also includes real estate investors. The investment in server farms can reach huge amounts - depending of course on its size and the level of technology. This year, for example, Google is set to invest $13 billion in real estate in the US, most of it for building server farms.

These high investment amounts require some of the players in the sector to team up with real estate investors who will bear some of the burden. Adv. Mike Bedke, Partner at the Miami office of global law firm DLA Piper, says that he sees more deals in which tech giants collaborate with a proven player in the server farm sector, such as Cyrosone, which builds server farms and operates them.

Three models for investment in servers

Real estate investors can operate using two models: the first model, purchasing land and leasing it to external companies that are building server farms. This of course has to be a long-term investment. The second model is more interesting and involves participating in developing and building the server farm. In other words, we are talking about a type of commercial real estate - instead of building a commercial center and leasing the stores in it, this would include setting up a server farm and leasing the storage in it to external companies. Bezeq Israeli Telecommunication Co. Ltd. recently set up a server farm in Israel at a cost of NIS 100 million. Bezeq has adopted a somewhat different approach and decided to take advantage of land at its disposal for this purpose.

The combination of real estate and server farms is also reflected in mergers in this field. For example, Canadian company Brookfield Infrastructure, one of the world's largest infrastructure companies, and real estate fund Digital Realty Trust, purchased the Brazilian company Ascenty, which provides and operates server farms to several of the world's leading cloud platforms - for $1.8 billion. Brookfield is close to completing another deal - acquiring 31 server farms from AT&T - for $1.1 billion.

Where is the most attractive market?

Last week, DLA Piper held its annual Real Estate Summit in Israel, which among other topics, presented data about the global server farm industry as well as the results of a survey conducted among hundreds of senior executives in the US real estate sector. According to the survey, huge server farm complexes were cited as one of the five most attractive for real estate investment, and as a target for investment trends in the coming year, ahead of investments in real estate offices in city suburbs, retail or industrial buildings (not including logistics), hotels and student hostels.

According to Adv. Jay Epstien, Co-Chair of the Global Real Estate Sector at DLA Piper, "The growing demand for data centers and server farms is creating massive movement for major real estate players entering the sector, which has similar characteristics to income producing property. It is important to remember that to set up server farm complexes, there is a need for an available workforce living nearby. Generally, server farms are built far from city centers, so that this indirectly influences the residential real estate market."

The growth in server farms worldwide raises the question - where is the most attractive market? According to a recent report published by the JLL real estate company, in terms of megawatts, data centers need a great deal of electricity - the US is the preferred location for building server farms. Server farms in the US currently consume 775 megawatts, up 200% since 2017. However, this figure does not reflect the number of centers, but rather their overall size.

In Europe, the city with the highest electricity consumption for server farms is London followed by Frankfurt with 46 megawatts. The number of centers is expected to continue growing rapidly due to the setting up of 5G cellular networks, which will lead to the improvement in surfing speeds and a rise in the volume of data.

Published by Globes, Israel business news - en.globes.co.il - on April 15, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Jay Epstien Photo: Israel Hadari
Jay Epstien Photo: Israel Hadari
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