A Deep Dive on Data Centers

COVID-19 Highlights the Importance of Data Centers

The importance of the internet economy and the infrastructure that supports it, including data centers, has become extremely clear during the coronavirus pandemic.

Data centers are locations that collect, process, store, distribute, and provide access to large amounts of data. They are essentially large, warehouse-like buildings filled with computers.

According to Devan Adams, a Principal Analyst at the consulting firm Omdia, “Data centers are experiencing massive surges in consumer internet usage due to the coronavirus-inspired increase in demand for e-learning, remote working, binge television watching, and other activities.”

Companies Making Deals in the Data Center Sector

After a strong 2019, the Real Estate Investment Trust industry, or REIT, began to struggle as a result of COVID-19. REITs finance or own real estate across a number of sectors and the total returns for publicly traded ones rose 28.07% last year. However, REITs as a whole dipped 25.4% in the first three months of 2020.

With that said, data center backed REITS were one of the only segments that saw gains in the first quarter, growing 8.8%. More specifically, shares of companies such as Equinix Inc. (EQIX), CyrusOne (CONE), QTS Realty Trust (QTS) and Digital Realty Trust (DLR) have registered double-digit gains so far in 2020.

This week, Equinix Inc. announced a $750 million deal in which it will purchase 13 data centers from Canadian telecommunication company BCE Inc. (BCE). If the deal is finalized, Equinix Inc. will gain 1.2 million square feet of Canadian data center space. It would also help expand its interconnection services, allowing data to be exchanged privately between businesses, to seven additional metro areas. The deal also includes 400,000 square feet of server colocation space, providing physical space and security for equipment.

Three months ago, Digital Realty Trust completed its merger with InterXion , a European data center, in a $8.4 billion deal. The data-center giant is no stranger to the M&A space. In 2017, Digital Realty Trust bought DuPont Fabros Technology, another data center, for about $7.6 billion.

Private Equity Shows Increased Interest in Data Centers

Private equity companies are also making deals in the data center sector. For example, KKR & Co. (KKR) is spending $1 billion to launch a data center venture called Global Technical Realty in Europe where the company will build and develop these specific types of real estate assets.

Zooming out, more and more companies are outsourcing data storage to third-party vendors, which may be one reason private equity firms like KKR & Co. are becoming increasingly interested in the space.

Last year was the biggest year yet for mergers and acquisitions involving data centers. In addition, there was a 50% increase in private equity dealmaking in the industry. The pandemic put data-centers in the spotlight. Going forward, investors appear to believe that they will be an important part of the modern-day digital economy.

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