Data center REITs operate crucial data infrastructure. They own and manage facilities that customers use to house servers and networking equipment to store and access data. With data usage growing, demand for these facilities continues to expand.

Here’s a closer look at data center REITs and why investors might want to consider the sector. Image source: Getty Images. Understanding data center REITs

A data center is a specially designed facility consisting of the building shell; electrical systems; heating, ventilation and air conditioning (HVAC) and mechanical systems; and other commercial space. Data centers feature highly secure and redundant equipment. They aim to provide customers with uninterrupted access to their data at any time.

Like most other real estate investment trusts ( REITs ), data center REITs rent space in their facilities to tenants. They typically rent space to multiple customers (e.g., colocation) but can rent the entire facility to one tenant (e.g., enterprise or hyperscale). The tenants use this space to house their networking equipment and servers, allowing them to process and store data.

In addition to renting space, data center REITs provide several other specialized services to their customers, including highly reliable power, a regulated temperature, and physical building security. Data center REITs also provide interconnection services to their clients, meaning a physical network connection between two parties. Advantages of investing in data center REITs

Data center REITs allow investors to benefit from the growth in data usage. According to IDC, data usage is on track to grow at a 24% compound annual rate through 2025. That should drive the need for additional data infrastructure to transmit and store this data, including more data center capacity.

Another benefit of data center REITs is that they tend to be relatively recession-proof . That’s because most tenants sign long-term contracts for space in a data center. That allows data center REITs to generate recurring revenue. Risks of investing in data center REITs

Data center REITs are less risky than many other real estate investments and technology stocks . However, they aren’t without risk. Here’s a look at some of the factors that can affect these REITs: Interest rate risk : Rising interest rates affect all REITs. That’s because REITs tend to borrow a lot of money to expand. As rates rise, it can increase their borrowing costs. In addition, rising rates make lower-risk, yield-focused investments such as bonds more attractive. That often weighs on REIT stock prices to push up their dividend yields and compensate investors for their higher risk.

Oversupply risk : Data center operators often build new capacity on speculation. If they build too many data centers, the surplus can affect occupancy levels and rental rates.

Environmental risks : Data centers use a significant amount of energy and water to keep servers and networking equipment running and cool. Because of that, they face environmental risks from climate change, storms, and droughts that can affect a data center’s ability to deliver 100% uptime.

Four data center REITs to consider in 2021

According to the National Association of Real Estate Investment Trusts (NAREIT), only four REITs focused primarily on owning and operating data centers in late 2021. Here’s a closer look at this quartet: CoreSite Realty

CoreSite Realty is a hyper-focused data center REIT that operates 25 data centers in eight U.S. markets. Its centers are located in some of the country’s biggest markets; CoreSite customers can reach 22% of the U.S. population, representing 31% of GDP.

CoreSite’s focus has paid big dividends for investors over the years. As of early August 2021, CoreSite had delivered the best performance of any publicly traded REIT over the previous decade, producing a 1,233.6% total return.

One of the keys to its success has been its steady growth. CoreSite develops purpose-built data center projects, allowing it to expand as its customers need more space. That has allowed it to steadily increase its revenue, cash flow, and dividend. These growth drivers helped power its ability to produce market-crushing total returns. CyrusOne

CyrusOne specializes in providing data center services to the world’s largest companies. It offers a flexible data center solution, Massively Modular, that allows it to expand as customers grow. CyrusOne can build out new data halls in only 12 to 16 weeks to quickly meet a client’s need for more storage capacity.

The company has steadily expanded over the years. It has added new U.S. markets to support a national footprint and expanded into Europe and Latin America. These investments have enabled the data center REIT to […]

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