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The data center industry is in the midst of an important transformation, positioning itself as an attractive investment opportunity within the real estate market. Traditionally known for functions such as storage, computing and network connectivity, data centers have evolved to encompass a broader range of applications. With the integration of cutting-edge technologies like artificial intelligence (“AI”) and machine learning, alongside high-performance computing for tasks such as high-frequency trading, the industry is witnessing new avenues for growth and development.

As investors reallocate capital from the office sector to real estate alternatives in the growing data center industry, it is important for investors to reach out to qualified legal professionals to assist in managing unforeseen legal challenges and to ensure compliance with applicable laws and regulations.

Rising Demand and Supply Constraints

Despite the industry’s rapid growth, the surge in demand for data centers, together with supply constraints and extended construction timelines, has led to climbing rental rates. Projections suggest a 10% to 15% increase in pricing this year, particularly for high-power demand workloads, reflecting the industry’s challenges in meeting growing demands. While operators may be prepared to offer discounts on lease pricing for legacy assets with vacancy, such concessions are unlikely to extend to AI workloads with high power demands.

Attracting Institutional Investment

The surge in demand for new data center development is expected to attract greater institutional investment this year. Analysts expect regions such as Dallas-Fort Worth and Austin-San Antonio, with land availability, tax incentives and developed power infrastructure, to remain attractive to developers and investors alike.

Addressing Connectivity and Infrastructure Challenges

The rise of AI highlights the need for data centers with robust network connectivity that can facilitate accelerated data transfer rates. Large language models utilized in generative AI, for example, require much more network bandwidth than what is currently available. As a result, ensuring increased power supply remains a critical imperative for the continued growth of the data center industry. Edge data centers, in particular, are expected to play a pivotal role this year, due to their ability to reduce latency and enable AI systems to process data in real-time for many applications such as streaming services and autonomous vehicles.

Additional challenges such as grid congestion and interconnection hurdles also hinder new data center development. Grid congestion, for example, leads to volatile fluctuations in electricity costs during periods of peak demand, necessitating the exploration of energy storage solutions. Interconnection hurdles also pose challenges, with the approval process for renewable energy projects significantly lengthened. Delays, coupled with mounting project costs, underscore the urgency for streamlining approval procedures. Streamlining approval procedures and expediting planning, permitting, and financing processes are essential to fueling new data center development.

Unlocking Investment Opportunities in Data Centers

The data center industry stands at the cusp of unprecedented opportunities. Although it also faces its share of challenges, embracing innovation and streamlining processes will help unlock the industry’s full potential within an evolving landscape. As you explore investment opportunities in the rapidly growing data center industry, it is essential to navigate legal complexities effectively. The real estate attorneys at Winstead PC can provide the expertise and experience in contract negotiation, regulatory matters and risk management, necessary to ensure compliance and to assist in maximizing your investment in this dynamic sector.

CONTACT:

Alden Paras

Alden Paras  I  713.650.2675  I  aparas@winstead.com

Alden Paras is a member of the Real Estate Development & Investments Practice Group in Winstead’s Houston office, representing institutional and private clients in the acquisition, disposition and development of commercial real estate.