Data Centers Buck Trend in Challenging Real Estate Market

Plus: Miami-based Highline Real Estate Capital has rolled out a $350 million investment fund dubbed Highline Real Estate Fund 1 to target distress.

Data Centers Buck Trend in Challenging Real Estate Market

Plus: Miami-based Highline Real Estate Capital has rolled out a $350 million investment fund dubbed Highline Real Estate Fund 1 to target distress.

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Good morning. Data centers have evolved from a niche real estate sector into a booming industry. A Miami-based firm has unveiled a $350M investment fund to target distressed CRE in the Southeast. Meanwhile, the White House has designated 31 tech hubs across the country to spur private investment in critical technologies.

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Market Snapshot

S&P 500
GSPC
4,247.68
Pct Chg:
0.7%
FTSE NAREIT
FNER
617.98
Pct Chg:
-0.9%/div>
10Y Treasury
TNX
4.821%
Pct Chg:
-0.4%
SOFR
1-month
5.30%
Pct Chg:
0.0%

*Data as of 10/24/2023 market close.

DIGITAL GOLD RUSH

How Data Centers Are Bucking the Commercial Real Estate Decline

A Niche Real-Estate Corner Goes Mainstream in the Digital Age

KIERSTEN ESSENPREIS FOR THE WALL STREET JOURNAL

With the rise of artificial intelligence, there's a notable expansion in a previously niche segment of the commercial real estate industry: data centers. Yet, environmental issues and energy constraints pose challenges to this swift expansion.

Explosive growth: Fuelled by AI's demanding power and cooling needs, developers are pouring billions of dollars into setting up data centers. Investment giants like Blackstone have seen their data center development grow tenfold in just two years. Similarly, tech behemoths such as Google, Microsoft, and Amazon Web Services have significantly increased their leasing of data center capacities. This massive growth differentiates data centers from other real estate sectors, which have been grappling with rising rates and inflation.

The role of data centers: Data centers are crucial infrastructure components, essentially acting as the physical space where the Internet resides. They house servers that store and process a vast amount of digital content, from software and apps to movies and photos. AI systems, such as OpenAI’s ChatGPT, demand more advanced data centers due to their higher power and cooling requirements.

Environmental concerns: Despite the bullish outlook on data centers, there are looming challenges. The energy-intensive nature of these centers, especially those catering to AI, raises concerns about their long-term electricity supply and environmental impact. This has led to regulatory hurdles in various regions, including Ireland and parts of the U.S.

➥ THE TAKEAWAY 

Poised for growth: While data centers have faced challenges in the past, the current demand, driven by AI and cloud computing needs, is unparalleled. Industry insiders and analysts believe that the sector's growth trend will continue, especially for centers equipped to handle AI's rigorous demands. The industry's response to environmental concerns and energy limitations will play a critical role in shaping its future trajectory.

SPONSORED BY BV CAPITAL

Texas Real Estate Investment Pays Off

Bridgeview acquired 17.066 acres of land in the third fastest growing city in the nation over the past 10 years – New Braunfels, TX.

  • 66% Population Growth Since 2012

  • 94% Average Occupancy

  • $1,664 Avg. Market Unit Price

  • 4-5% Annual Rent Growth Rate

On August 31st, 2023, BV Capital's New Braunfels Land investors realized a 34% return over a 20-month hold period.

This accomplishment signifies the first of several land offerings in Texas facilitated by BV Capital to progress from land purchase to recapitalization and sale, and into the next deal phase, development.

*Sold to accredited investors via a private placement memorandum and past results do not guarantee future returns. SOURCES: All Market Demographics from : RealPage, Inc. 2023; U.S. Census Bureau; American Community Survey (ACS) 5-year estimates, Growth Rate Source: IPA Marketing Analytics

DAILY HEADLINES

  • Legal battle: Investors and creditors are in a legal dispute over the proposed sale of StoryBuilt's $2B portfolio, with accusations of misrepresentation and trouble for ongoing deals.

  • Predicting the unpredictable: Despite claims to the contrary, economists generally can’t predict business downturns and should remain modest about their forecasting abilities.

  • Tenant win: Tenants in Jersey City have secured rent control after a landlord's failure to file for an exemption, potentially setting a precedent for tenant efforts in the future.

  • Waterpark wonder: Kalahari Resorts and Conventions began construction on a vast indoor water park resort in Virginia, aiming to open in 2026.

  • The juice ain't worth the squeeze: Florida's citrus industry is declining due to issues like citrus greening disease, causing orange growers to sell their land to real estate developers.

  • Shale showdown: With major oil acquisitions by Chevron (CVX) and Exxon (XOM), a race for dwindling quality shale assets is underway.

  • NOI nuances: Since NOI is a key metric in CRE investment and lending, it’s important to understand its implications on property valuation and financing.

  • Digging for data: Blackstone's (BX) QTS Data Centers subsidiary is investing $1.5B in four new data centers in New Albany, OH, a burgeoning Midwest hub.

  • Battery blueprint: Cities are exploring the effectiveness of using sports stadiums as anchors for large-scale developments, with Battery Atlanta as the model.

  • Sale success: Greysteel has announced the successful sale of the Park at Rialto, a Class A multifamily community in northwest San Antonio.

  • Leasing win: The Soloviev Group has successfully leased nearly 100 KSF at 9 West 57th Street in Manhattan to global investment firm Davidson Kempner Capital Management.

  • Houston hub: Alexandria Real Estate Equities is unveiling a $201.5M, 325 KSF multi-tenant life science complex in Houston, the company's first campus in the city.

  • Rate uncertainty: Anticipating the trajectory of interest rates in the context of CRE remains a challenge, but we’re unlikely to see a return to pre-pandemic levels.

LOOKING FOR DISTRESS

Miami's Highline Capital Launches $350M Distress Fund to Target Southeast CRE

Highline launches $350M distressed commercial real estate fund

From left: Highline Real Estate Capital’s David Moret, Matt Papunen and David Milgram (Getty, Highline Real Estate Capital)

Miami-based Highline Real Estate Capital has rolled out a $350 million investment fund dubbed Highline Real Estate Fund 1, targeting distressed commercial real estate owners in the Southeast.

Fund focus: Highline Real Estate Fund 1 aims to provide equity and debt financing to owners struggling to sell or finance office, retail, multifamily, and industrial properties. It will allocate as much as $75M in discretionary capital commitments, $100M in JV commitments, and $175M in debt financing, focusing on South Florida, Orlando, Tampa, Atlanta, the Carolinas, and other parts of the Southeast.

Bid-ask opportunity: The rise in borrowing costs has driven down CRE prices, widening the gap between buyer and seller expectations. With property sales volume down due to multiple rate hikes by the Fed, Highline’s new fund seeks to capitalize on the bid-ask spread, attracting owners looking to offload assets. Highline notes that, historically, this pattern of an exuberant market followed by a major shift and eventual capitulation is a recurring cycle in CRE.

➥ THE TAKEAWAY 

Southern charm: While Highline maintains a keen interest in South Florida's market, its gaze is steadily expanding towards other growth potential areas in the Southeast, such as Orlando, Tampa, Atlanta, and the Carolinas. The firm emphasized the robust market fundamentals in these regions, suggesting that even financially impaired assets could benefit from strong market tailwinds. The launch of Highline's fund isn't an isolated move, as other similar funds, like the $300 million initiative by 13th Floor Investments, have also emerged, indicating a growing interest in distressed assets in thriving markets.

QUICK HITS

📊 SURVEY: Take our 3-minute Fear and Greed Investor Index survey to help us understand investor sentiment in today’s market.

📖 READ: American downtowns, once bustling with office workers and commerce, have been left desolate by remote work. How do we repurpose them into vibrant neighborhoods?

▶️ WATCH: Moody’s Analytics put their experts in the Hot Seat to discuss all things CRE, including what sectors they see as the next dark horse of real estate.

🎧 LISTEN: In this episode of the Deconstruct, Daniel McNamara, founder of Polpo Capital, discusses impending challenges due to maturing CMBS and the associated risks for CRE landlords and investors.

🔍️ TALENT: Get more qualified candidates already vetted for your role, faster and cheaper than traditional executive search methods.

ECONOMIC EXPANSION

White House Earmarks $500M For 31 Tech Hubs

The Biden administration has recognized 31 communities as regional tech hubs to boost private investment in pivotal technologies and invigorate economic growth and employment.

American innovation: These Regional Technology and Innovation Hubs span across 32 states and Puerto Rico. They are eligible to vie for a slice of up to $75M in federal grants from the Department of Commerce's $500M pool, as detailed by Bloomberg. This initiative aims to foster tech-related economic activities beyond the conventional coastal tech areas like San Francisco.

Target sectors: The initiative draws its authority from the $53B CHIPS and Science Act, which President Biden approved in August 2022. It aims to evenly distribute the benefits of both governmental subsidies and an estimated $500B in private capital that has poured into the advanced manufacturing sector since Biden's presidency. The focus of these hubs will be to synergize private sectors, academic institutions, local governments, labor unions, tribal communities, and nonprofits. Together, they will work on nurturing and expanding industries like AI, semiconductors, clean energy, biotechnology, and precision medicine.

Hub initiatives: The designated hubs, the majority of which are situated in small and rural locales, will be specialized in specific technological domains. For instance:

  • South Florida Climate Resilience Tech Hub will work towards pioneering infrastructure answers to the global climate dilemma.

  • Texoma Semiconductor Tech Hub intends to integrate current and upcoming semiconductor supply chain frameworks.

  • Pacific Northwest Mass Timber Tech Hub will emphasize mass timber design and manufacturing.

Funding competition: While the CHIPS and Science Act allocated $10B for the venture, only 5% (equivalent to $500M) was earmarked by lawmakers. Out of over 370 applications from 49 states and four territories, just 31 hubs were shortlisted. Given the limited funding available, many of these hubs may not receive monetary support. Commerce Secretary Gina Raimondo has mentioned that this phase of designations will serve as a test run. Additionally, 29 development grants will be rolled out to assist contenders in preparing for upcoming funding cycles.

➥ THE TAKEAWAY

Hubs of growth: The White House's designation of 31 tech hubs is part of a broader effort to boost US innovation, economic growth, and development nationwide. While these programs aim to promote private investment, their success and impact will depend on how effectively they can replicate the success of established tech hubs and stimulate innovation in emerging markets.

📈 CHART OF THE DAY

MOB Sector Remains Stable, Attractive

According to a report from Institutional Property Advisors, the medical office building (MOB) sector has rebounded with stable property fundamentals despite challenges like COVID-related disruptions, but now faces a healthcare labor shortage as a potential obstacle to growth.

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