So you are looking to invest in data centers, but how much will it cost?
Data centers are a hot commercial real estate asset class right now, but for entrepreneurs looking to dip their toes into this market, securing data center financing can be a headache.
If you’re one of them, you’ll have seen how the current lending market is making it hard for investors to:
Yet with investment in this digital infrastructure racing up – set to reach $438 billion worldwide by 2028, up almost 50% from 2020 – the heat is on if you want to make a mark with this key CRE investment strategy.
Source: Statista
Finding the right kind of data center financing will be central to expanding your portfolio in this area – assuming you don’t have a few million dollars lying around spare.
With that in mind, let’s explore how to finance a data center, including the different costs and financing structures involved.
Is a lack of commercial property financing holding you back? Duckfund’s Sign-Now-Pay-Later model will help you unlock those lucrative deals that you’ve been missing out on.
Investment in data centers is growing because of the different ways investors can make money from them.
One way of looking at a data center is a kind of high-tech hotel for servers and IT equipment. This opens up several lucrative opportunities, including the following.
This is when companies rent data center space to house their servers and equipment. The bigger the center, of course, the more space you can make money from.
Some data centers offer cloud computing services that supply companies with on-demand connectivity. This saves businesses from managing their own physical infrastructure.
To continue the hotel analogy, data centers can offer added services as part of the deal. Whereas a hotel might include room service, a data center could offer server maintenance, network management, and security solutions. This adds value for customers and increases revenue potential.
With the above opportunities in mind, some people may believe data center owners are swimming in profit, but this isn’t necessarily the case – especially when it comes to building one.
First up, building a new data center requires significant upfront capital for land, construction, and specialized equipment. That’s not to mention the robust power and cooling systems they need to keep equipment running at optimum levels.
It’s also a long-term investment. Data centers take time to reach full capacity and, thus, profitability. Investors must have both patience and strategic planning to hit their targets.
Finally, let’s not forget that it’s a competitive market out there. With data center investment rising, you may have several competitors to duke it out with once you start marketing your center.
This makes it vital to have a clear business plan (including how you’re going to finance it) ready before you take the plunge.
The level of profit you make from a data center will depend largely on the type of center you build or purchase.
Here’s an overview of three main types.
Wholesale centers cater to large enterprises or cloud service providers, offering high power density and scalability. They often have higher profit margins due to long-term contracts with large clients.
This is a center that offers smaller spaces to a wider range of clients. While profit margins may be lower per square foot, you can benefit from higher occupancy rates.
As mentioned, managed centers offer additional services that can lead to higher profit margins. The fly in the ointment here, though, is that they require a more complex operational setup which eats into your budget.
Once you have the type of data center that you intend to buy or construct in mind (and the levels of profitability you can expect), you should start to get a clearer picture of the costs you’ll need to factor in.
The next section will focus on how to draw up a data center cost analysis.
We know that building or buying a data center isn’t cheap, but just how much are we talking about?
Having a clear idea of the costs involved is hugely important. As Karthikeyan K, a civil engineering expert puts it, “Given their strategic importance, the construction of data centers requires meticulous planning, precise cost estimation, and effective budgeting.”
To help with this and arrive at some figures, let’s break down the costs we can expect to pay.
Acquiring the land and building the physical infrastructure will obviously be the main expense. This will vary significantly depending on the area you choose.
This expense, of course, won’t come into account if you’re simply buying an already-built center, but the location of the land and the type of construction will affect the asking price.
ESG (Environmental, Social, and Governance) laws require us to keep sustainability in mind when investing.
“Data centers are energy-intensive facilities, and their environmental impact is a growing concern,” stresses Karthikeyan K. “Many countries and regions have implemented energy efficiency standards and environmental regulations to address this issue”
Regulators frequently update legislation in line with this, particularly in European and US real estate sectors.
This may mean installing power and cooling systems that use renewable energy to help meet emissions and energy efficiency targets, but these may come at a premium.
If you’re buying, some data centers may have out-of-date systems that you need to upgrade.
The cost of servers, storage, and networking equipment may add up quickly, but they’re a core component of a data center.
You’ll want to keep everything safe, both physically and digitally. Robust security measures and ongoing maintenance are essential but can be another big expense.
Data centers come in a range of sizes, from the hyperscale data centers favored by technology giants down to simple office-sized lots.
You may get more bang for your buck by building or buying a data center in a less fashionable location but with a bigger plot size. Arkansas and New York have very different markets, for example.
Intel Granulate, a firm of data technology specialists, recently researched how much a typical data center costs in the United States.
They categorized the centers into three categories, small (or micro), mid-sized, and large or “Telco Room”.
A small data center, which is a location that houses up to 140 servers (or 10 racks), can range from $200,000 to $500,000 to build. You must also add running costs of $50,000 to $100,000 a year onto that.
Mid-sized data centers, those up to 1,400 servers (100 racks), typically range from $2 million to $5 million, with running costs of $200,000 to $500,000.
A large center, meanwhile, normally runs into the tens of millions of dollars. These will come with much higher running costs, of which you should expect to pay over $1 million in most cases.
High building or purchase costs mean that many investors must look at data center financing options to make the project work. However, funding options may not be readily available.
In the next section, we’re going to explore ways to find data center project financing in the US market right now.
So, how do you finance your tech powerhouse?
Many CRE investors are worried about raising capital for new projects right now. Around half of property entrepreneurs expect the cost and availability of capital to worsen in the short term, according to a recent survey by Deloitte.
CRE investor concerns in 2024
Source: Deloitte
The real estate financing market is difficult right now but there are some possibilities, including funding options where you don’t even need to dip into your own liquidity.
Here are some options you could look at.
Banks and lenders may offer a loan or credit facility, but securing them can be challenging due to the specialized nature of data centers and the high credit requirements they impose, and that’s before we get on to fixed or variable interest rates.
Many investors form partnerships with other buyers to finance a deal. This might be with an individual, a group, or a private equity firm. The incentives to do this include shared group knowledge and the lower amount of financing you need to find.
Some REITs focus on data center construction financing. These are funding pools that take care of buying, building, and managing the centers so that you don’t have to directly get involved. Instead, you put your money in and hope for a return over time.
The funding gap caused by a lack of traditional financing options has led to a new wave of alternative financial services to meet the demand.
A key component of this are CRE lending platforms. Quicker and more affordable than lenders of old, they’re helping investors expand their CRE portfolio without resorting to expensive lending or refinancing options.
The data center market is getting more competitive, so having quick access to data center financing is a big advantage. It can be the difference between securing or losing a property in some cases.
Duckfund’s Sign Now, Pay Later model is designed to help you lock down hot commercial real estate, like data centers, ahead of rivals.
Here’s how:
Jump the soft deposit hurdle: Putting money down to secure real estate with a soft deposit (or earnest money) is a big roadblock for investors. Duckfund provides speedy financing (usually in less than 48 hours) to get you there before anyone else.
Work on multiple deals at once: A quick turnaround time means you get to fast-track your portfolio growth by working on multiple projects at once.
Eliminate risk: Safety is our number one priority, which is why we use a secure LLC to hold the soft deposit funds in escrow. If the deal falls through, your personal funds won’t be touched. Instead, you pay only if you choose to proceed.
High approval rates, low fees: We use artificial intelligence metrics to give us a clearer picture of your business that goes beyond bank statements and credit checks.
This means we’re more likely to approve you for funding, and fees stay at a minimum as we don’t have to process paperwork.
Flex your finances: Because you don’t have to dip into your own funds for the soft deposit, you can use your own money for other expenses that help your business grow, or simply boost your business’s cash flow.
Duckfund frees up your capital for other uses. You can use your own money for renovations, due diligence, or even down payments on other deals, all while securing properties with Duckfund's financing.
Don’t let slow finance put the skids on your data center financing. Take just two minutes to fill out our simple form and find out where Duckfund can take you.
