Non-Traditional U.S. Real Estate Sectors

Making sense of data centers, medical office, self-storage and life science

February 19, 2024
Fenton Student Housing - Cary, NC
Caption Fenton Student Housing - Cary, NC

Introduction

In the U.S., real estate sectors such as Data Centers, Build-to-Rent (BTR), Student Housing, Medical Office, Self-Storage, and Life Science have been attracting increased interest and a larger share of commercial real estate transaction volume. As such, we believe there may be significant opportunities here going forward.

Typically, these sectors have been the focus of real estate investment trusts, but in recent years some other sectors (such as Life Science and Self-Storage) have become a meaningful part of most core (NFI-ODCE) and core-plus portfolio allocations and continue to grow in exposure and liquidity. The following analysis represents the views of Hines Research on the demand drivers and investment outlook for these other sectors expected to generate attractive investment opportunities going forward.


Data Centers

Non-Traditional U.S. Sectors
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Data Centers

The COVID-19 pandemic highlighted the importance of digital infrastructure across the globe. The demand for data storage and processing has been increasing rapidly with various drivers fueling growth. Per the graph below, Green Street estimates that the data center sector will grow noticeably faster than other property types over the next five years. There are several types of data centers, including:

There are several types of data centers, including:

  • Powered shell data centers where the landlord owns the real estate (shell) and the tenant is responsible for building and maintaining the data center infrastructure (lease typically >5 years).
  • Colocation data centers where multiple small-scale tenants can rent space to house servers and networking equipment (lease typically <5 years).
  • Managed services data centers operated by third-party providers offering services such as server management and maintenance (lease typically >5 years).
  • Enterprise data centers owned and operated by individual companies for their own use.
  • Hyperscale data centers designed to support the infrastructure of large technology companies, such as Google or Meta (lease typically >5 years).

New supply has not kept up with increased demand1

1Green Street Data Center Update as of August 25, 2023

Primary markets such as Northern Virginia have had difficulty adding power capacity, resulting in increased spillover to secondary and tertiary markets. This has also resulted in increased liquidity and a rebound in average rental rates2 (14.5% year-over-year as of YE 2022). Northern Virginia is among the largest U.S. data center markets due in part to its proximity to major internet hubs, abundant power supply, and cool climate. Other primary markets are also attractive for a variety of reasons. For example, Phoenix and Dallas have a low cost of living and a skilled workforce, Silicon Valley is mission-critical to many tech companies, and the Portland market has low power costs (abundant hydro-generation) and is home to many undersea cable terminals.

The sector has historically featured stable cash flows, long-term growth potential and has been relatively recession-proof as data centers have become essential to virtually all businesses.

2CBRE Research, CBRE Data Center Solutions, YE 2022. Hines confirms that, to the best of its knowledge, more updated information is not available and the above remains materially accurate.

Download the full paper to learn what is driving demand in other non-traditional U.S. real estate sectors.

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Disclaimer


The content herein and in the report is provided for informational purposes only. Nothing above or in the report constitutes investment, legal, or tax advice or recommendations. Such content should not be relied upon as a basis for making an investment decision and is not an offer of advisory services or an offer to invest in any product or asset class. It should not be assumed that any investment in an asset class described herein will be profitable. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice. Opinions or beliefs expressed in these materials may differ or be contrary to opinions expressed by others. Certain information above and in the report has been obtained from third-party sources. Hines has not independently verified such information.