The paradox of data centers is that the world’s most measurable infrastructure operates inside one of real estate’s least understood asset classes. Capital is flooding in but valuations are guesswork and the investors funding AI’s physical backbone can not agree on what they’re buying.

During 2024, more than $450 billion was invested in data centers globally, a 50% increase from the prior year, and by 2029 some experts say annual data center investment will exceed $1.1 trillion. However, from 2020 to 2024, less than $10 billion of data center assets traded annually. Despite 5,400 operating facilities in the U.S., and nonstop development activity, the market has not yet determined how much a data center is worth.

Lacking sale data, three U.S. researchers turned to the public markets, examining some of the institutional characteristics of the asset class by delving into the performance of data center REITs. They found data center REITs provided a 1.9% average monthly return from 2000 to 2024, but that came with a stroke-inducing 22% standard deviation.¹ Equity REITs, by comparison, earned 0.9% average monthly returns but at a far calmer 6.1% standard deviation. In fact, data center REITs outperformed by two times or more all the major real estate indexes and the S&P 500 during that period, but on a risk-adjusted basis trailed those metrics almost by half.

The trend inverted during and in the wake of COVID. From January 2020 to January 2024, data centers posted 0.27% monthly returns and a low standard deviation of 4.9%. REITs overall performed slightly better, between 0.3% and 0.4% monthly, but with an average standard deviation of approximately 6.5%. As you likely know the S&P 500 outperformed real estate during this time, returning 1.1% monthly with a 5.6% standard deviation. In all, data center REITs during normal times are great performers but highly volatile, and during hard economic times are generally stable.

Interestingly, data center REITs have low correlations with other REITs and with the broader stock market over the long term (0.24 and 0.33, respectively), while REITs overall and the stock market are highly correlated.

It’s important to note that the sample set is small. There was one data center REIT at the outset of the study’s period and six by the end in 2024. The researchers acknowledged this and employed various methods to ensure a “balanced and consistent analysis.”

Even so, these results - and their low correlations to real estate - contextualize a question many people have asked: Are data centers real estate, infrastructure or something else entirely?

Obviously data centers are in physical buildings and often generate income via leases. But, like power plants, they provide a critical public service, are capital intensive, and often have long-term predictable cash flows, much like other infrastructure assets.

But data center risks feel unique. Those risks include the product type’s extra sensitivity to energy costs and power availability, plus “technological obsolescence requiring costly upgrades,” according to JLL. That obsolescence risk is real, as advances in AI “necessitates a fundamental reevaluation of the design… of data centers to accommodate the distinctive requirements of various AI models, rather than merely expanding infrastructure.”

And there are diversification issues that are more acute here vs. other real estate asset classes: The tenant universe is small and homogenous. Digital Realty - a public data center REIT - said 51% of its recurring revenue came from its 20 largest customers as of December 2024. Those tenants are largely birds of a feather: “Large technology and telecom companies account for nearly half of total occupied data center space,” says CBRE.

And you may think data centers’ revenue is simply rent, but it also can include colocation fees, interconnection services (e.g. cross‑connect monthly fees), managed services, hardware rental and other value-add services like security and renewable energy procurement.

So in short, data center owners do not just rent space and ensure access to power. Their product looks like real estate, but they actually run expensive, highly technical service businesses for a specialized set of clients. Sustaining competitiveness requires continual capex investment to stay ahead of obsolescence.

All of this makes valuing a data center difficult. Even with strong, if volatile, public-market performance, the fundamental assumptions in an underwriting - market rent, vacancy and exit cap rates - are very hard to comp. That uncertainty, more than anything, explains why this asset class remains one of the most opaque corners of institutional real estate. Until true price discovery emerges, conviction - not comps - remains the investor’s primary guide.

Who: Invest Clearly

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The Sparkle: For individual investors looking to put money in real estate, remember your Latin, “caveat emptor.” The barriers to entry for real estate sponsors are low and anyone reading The Haystack knows agent-principal misalignment in real estate presents real risks to returns and even to invested capital. Invest Clearly is shining a light on good (and bad) GP actors with its site, with 1,500 reviewed and searchable sponsors. The firm’s revenue model and overall structure are designed to preserve independence and neutrality. The Haystack applauds that.

Walk into a medical building and the best clue that someone's a clinician is still a 200-year-old technology: the stethoscope around their neck. Do you think it’s odd we’re still relying on this thing? It hasn’t changed much since Cholera was the world’s biggest health concern, and its flaw is fundamental: Most diseases don’t show up in heart sounds (that humans can hear) until the disease is advanced.

But AI comes for everything. Soon you will be seeing digital stethoscopes with feedback from AI-informed algorithms “able to detect early stages of disease.” Maybe the AI can do us all another favor and make the end of the stethoscope a little warmer too.

Link: https://theconversation.com/stethoscope-meet-ai-helping-doctors-hear-hidden-sounds-to-better-diagnose-disease-267373

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