Sector

Data centers are in demand ... and I don't see that changing anytime soon

Within the global real estate market, AI is but one of several factors lifting the data-center industry, where growth may be poised to continue, says Fidelity's Steve Buller.

  • Data-center operators have been some of the best performers within the real estate investment trust market, according to Fidelity Portfolio Manager Steve Buller, who believes they are well-positioned to benefit from long-term market trends in the coming years.
  • "Entering 2023, data centers were already supported by a strong fundamental backdrop, driven by limited supply and growing demand," explains Buller, who manages Fidelity Advisor® Global Real Estate Fund. "Now, especially with the newfound excitement for artificial intelligence, that imbalance has become even more pronounced."
  • Helming the fund since 2016, Buller seeks capital appreciation by investing in securities of companies that own and, in most cases, operate commercial real estate properties. He notes that with roughly half the opportunity set for real estate located outside the U.S., a global approach can help identify the most compelling opportunities worldwide.
  • "Data centers are specialized properties through which the world's online traffic gets routed," says Buller, noting that as more global communication happens over electronic networks, data centers directly benefit from the increased usage.
  • That said, he believes it's become increasingly challenging to meet the rapid growth in demand for data centers, due to constraint on new supply, access to power and water resources—which are needed to operate and cool the facilities—and a scarcity of optimal locations.
  • "Many customers want to be close to the internet's on and off ramps to make their data connections faster, yet there's finite supply of data centers operating in these 'ideal' places," Buller points out. "Thus, well-located data centers have seen particularly strong growth in rental income."
  • This has created tremendous pricing power in the industry, with data-center rental rates doubling in the past 12 to 18 months, and with customers paying the increase because they have little choice if they want to provide fast-enough user connections, according to Buller.
  • The fund remained overweight data-center REITs as of December 31, with sizable positions in industry leaders Equinix and Digital Realty Trust.
  • "I've found data centers to be an attractive segment of the REIT market for some time," he concludes, "and I believe demand provided by AI could provide the industry an even stronger long-term tailwind."
  • For specific fund information such as standard performance and holdings, please go to the "Funds Managed" link on this page.
 
 

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