Investing in Data Center REITs

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) 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, as in co-location, but can rent the entire facility to one tenant. The tenants use the 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. With the rise of artificial intelligence (AI) and the immense computing power required for it, the need for server farms and large facilities capable of significant data processing will continue to grow. That should drive the need for additional infrastructure to transmit and store data, including more data center capacity.

Another benefit of data center REITs is that they tend to be relatively recession-proof because most tenants sign long-term contracts for space in a data center, allowing 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 because REITs tend to borrow a lot of money to expand. As rates rise, borrowing costs can increase. In addition, rising rates make lower-risk, yield-focused investments, such as bonds, more attractive. That often weighs on REITs 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. They face environmental risks from climate change, storms, and droughts that can affect a data center's ability to deliver 100% uptime.

Two data center REITs to consider in 2025

According to Nareit, the National Association of Real Estate Investment Trusts (Nareit), as of March 2025, only two data center REITs exist that are larger than micro caps, and they primarily focus on owning and operating data centers. Here's a closer look at these players:

1. Digital Realty

2. Equinix