Growth Of Data Centers

How Long Will It Last?

Data center REIT shares have rewarded patient investors with gaudy price appreciation. The question now is whether all the good news has already been baked into the share prices?

Publicly traded data center providers continue delivering incredible returns year-to-date, with a sector-average return of about 40 percent. How long can this trend continue?

It’s impossible to predict future prices for companies traded publicly. However, looking at factors driving the outperformance, and calculating a few valuation metrics it may shed some light on share prices sustainability going forward.

The Vanguard Real Estate ETF (VNQ) is the largest real estate-
sector exchange-traded fund and a good proxy for the broader REIT sector performance. Obviously, owning the five data center REITs in an equal- weight portfolio would have significantly outperformed VNQ so far this year.
The digital transformation and hybrid IT solutions being deployed by traditional Fortune 1000 enterprise will likely continue unabated. Performance-sensitive applications, SaaS, and digital content distribution usually require a geographically distributed IT architecture to provide a good user experience for both public and private businesses and consumer clients.

Additionally, elastic software-defined network (SDN) options, such as those provided by Megaport, PacketFabric, and Epsilon, can provide on- demand connectivity options for colocation customers. Other than flexibility, these types of service offerings can make third-party data centers an attractive option due to the ability to expand in place, and in some certain cases provide a more cost-effective solution.