The M&A market for data centers is in a boom period.
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Data center acquisition volume hit record levels in 2016, and that record will likely be smashed in 2017 when the Verizon and CenturyLink portfolio deals close.
While there were a few larger deals in 2016 — mainly involving Equinix and Digital Realty Trust — majority of the sales were “small-ball,” a combination of many singles and a few triples averaging $65 million.
According to a report just released by Charlotte, North Carolina-based Five 9s Digital, data center acquisitions more than doubled in 2016 to almost $1.7 billion. Notably, 2015 was a slow year with just $750 million in transactions. However, the $1.7 billion in 2016 eclipsed both 2014 and 2013 transaction dollar volumes of $1.2 billion and $1.3 billion, respectively.
While the dollar value of sales doubled in 2016, the difference in aggregate square footage of data center acquisitions in 2016 versus 2015 was not nearly as large. The 2016 sales totaled about 6.2 million square feet, versus 4.4 million the prior year, a difference of 41 percent.
While the $3.6 billion Verizon data center portfolio sale to Equinix and the $2.3 billion sale of CenturyLink data centers to a group of investors were announced last year, they are scheduled to close in 2017.
“If you take out the pending VZ and CenturyLink transactions, we anticipate normalized dollar volume to be between 2015 and 2016, in the low $1.2 billion range of total transactions, based upon some deals we are tracking that did not finalize by end of 2016, and general activity in the market,” Five 9s partner Doug Hollidge told Data Center Knowledge in an interview.
Tacking $1.2 billion on to the $5.9 billion of home-run deals under contract would lead to a spike up to $7.1 billion in data center transactions for 2017. However, this can swing considerably over a 12-month period and one large portfolio deal or large single transaction can have a big impact on total volume.
“As a number of the larger tier-one long-term, single-tenant assets and other low hanging fruit have been acquired over the past several years, investors will spend more time evaluating multi-tenant data centers and investment opportunities in tier-two markets,” according to the Five 9s report.
“Heading into 2017, we anticipate cap rates for single-tenant, good credit leases will be in the 6.25-7.25 percent range pending underlying lease dynamics. Data center assets lacking clear credit, shorter-term leases and/or multi-tenant occupancy are estimated to trade in 7.5-8.75 percent cap rate range with various factors that may affect the swing outside of these parameters.”
The December boost in interest rates by the Fed and investor expectations of a rising rate environment in light of the incoming Donald Trump administration’s policy statements could serve to accelerate the number of deals closing during the first half of 2017. Purchasers will be looking to avoid higher rates anticipated later in the year.
Tip Of the Iceberg?
When the Verizon and CenturyLink portfolios close, it will skew 2017 results into uncharted territory for data center acquisitions. However, it will still be a drop in the bucket in comparison to the trillions of dollars of commercial real estate deals consummated each year. On the other hand, this boost in activity could be kicking off a “new normal” in sales activity for the data center asset class going forward.
According to published reports, Silver Lake Partners-backed Vantage Data Centers is exploring strategic alternatives, as well as data center operator Cologix, backed by investors including Columbia Capital and Greenspring Associates. This could be the tip of the iceberg if additional private equity-backed data center operators look to cash in on high valuations and investor demand for this asset class.
Additionally, there are still several remaining legacy telecom portfolios which are widely reported to be for sale.
Notable 2016 US Deals
Corporate Office Property Trust (OFC) contributed six data centers valued at about $150 million and reportedly leased to Amazon Web Services into a 50/50 joint venture with leading data center private equity shop GI Partners.
QTS Realty purchased the former DuPont Fabros Technologies NJ1 data center campus in New Jersey for $125 million and is investing additional funds to make it easier to lease space to smaller colocation customers.
The largest transaction by price was the GI Partners $276 million acquisition of the KOMO Plaza data center and office building in Seattle. The deal was completed in December of 2016 and totaled approximately 293,727 square feet.
The largest single transaction by building size was the $210 million acquisition of the 733,000-square foot Garland Center building in Los Angeles.
On the international front, Digital Realty Trust agreed to buy eight European data centers and operating business from Equinix for $874.4 million. This deal was driven by EU Commission competition requirements surrounding the Equinix purchase of competitor TelecityGroup.
In a related but separate transaction, Equinix purchased the St. Denis, Paris data center campus along with the operating business from Digital Realty for $211 million. Equinix now owns the facilities which house its PA2 and PA3 IBX colocation data centers.