Investing in AI from the ground up: data centers

With artificial intelligence booming, real estate investors looking to capitalize should consider the coinciding growth in demand for data centers, says Fidelity's Sam Wald.

• Within the real estate sector, data centers may be the ones standing atop the podium when all is said and done given that AI is being heralded as the world's next major transformative technology, according to Fidelity's Sam Wald.
• "Even if AI falls short of its lofty promise, usage of the technology is likely to experience a period of rapid growth that should also drive demand for data centers," says Wald, portfolio manager of Fidelity Advisor^® Real Estate Fund.
• In running the fund, Wald invests in securities of companies that own and, in most cases, operate commercial real estate properties, including data centers. He employs a bottom-up, or stock-by-stock, investment approach to determine the relative appeal of individual REITs, seeking to take advantage of significant pricing discrepancies in the market.
• Wald explains that data centers play a critical role in the growth of this technology by providing specialized physical locations that require sufficient cooling to support AI's increased computing power.
• "In fact, research suggests that AI-focused data centers require five times as much cooling as regular data centers do, a significant factor fueling the supply-demand imbalance for REITs catering to this tech," Wald stipulates.
• He is looking to capitalize on this dynamic through investments in leading players Equinix and Digital Realty Trust, each among the fund's largest positions on October 31.
• "I particularly like Equinix's increased exposure to interconnection, which refers to the points at which different communications networks connect and overlap," says Wald.
• Furthermore, he describes how this specific AI-focused segment of the data center market isn't nearly as monetized as normal data centers, placing Equinix in what he considers a strong competitive position.
• Meanwhile, Wald believes Digital Realty Trust also could benefit from the robust, fundamental backdrop for data center REITs.
• "Given the momentous size of the investment theme that is generative AI, broad exposure to this segment of the real estate market makes the most sense to me until the winners and losers are sorted out," concludes Wald.