The growth usage of technology resources as a service and on demand is breaking a new path in real estate. The Iberian REIT & Listed Conference, that took place last week in Madrid, was to perfect stage to discuss how closely Data Center investments resemble traditional real estate sectors, considering factors like obsolescence risks and supply/demand.
The event organised by Iberian Property and EPRA featured a roundtable discussion moderated by Richard Betts, Co-Founder & Head of Content at Real Asset Media, where the increasing strategic importance of data centers was even compared to military infrastructure due to their essential role in national security and economic stability. As a result, location selection is becoming more complex, with geopolitical, energy, and connectivity factors playing a crucial role.
Jacques Perdrix, Head of Europe & Portfolio Manager Public RE Securities at HEITMAN, emphasized the explosive growth of global data production and the structural, long-term drivers supporting the data center industry. He illustrated this with projections from Statista showing that the amount of data generated worldwide is set to increase from 175 zettabytes in 2025 to around 600 zettabytes by 2030 and over 2,140 zettabytes by 2035. To put this into perspective, one zettabyte equals one billion terabytes, meaning that by 2035, the world will generate about two trillion terabytes equivalent to two quadrillion gigabytes of data annually.
To further quantify the scale of this demand, Jacques pointed out that the most powerful hard drives available today hold 20 terabytes each. Meeting future storage needs would require over 100 billion of these high-capacity hard drives by 2035. On an individual scale, this translates to each person on the planet needing to buy and store 1 to 2 high-capacity hard drives every year just to keep up with projected data consumption.
This surge in data production has major implications for energy consumption. Currently, the global data center industry consumes 60 Gigawatt-hours (GW/h) of power, with the largest players (FLAP-D market) accounting for 80–90% of that. Over the next five years, this demand is expected to increase by more than 2.5 times, surpassing 150 GW/h. In Europe, where current capacity stands at 6 GW/h, demand is projected to quadruple to over 25 GW/h, primarily driven by cloud computing and data protection requirements.
Spain is emerging as a key market in this landscape. "Madrid’s data center capacity has already grown from 100 MW/h two years ago to 250 MW/h today. Projections suggest further growth to 500 MW/h in the near term. The overall Spanish Data Center market capacity could potentially be reaching 800 MW/h to 1 GW/h in the long run, representing a 40% compound annual growth rate. Given this trajectory, I firmly believe Spain is on track to transition from a Tier 2 to a Tier 1 data center market, attracting significant investor attention", he stressed.
Data Centers as critical infrastructure and the challenge of supply constraints
One of the key challenges is the cost and availability of energy. He pointed out that while the average cost of electricity in the U.S. is around $8 per kWh, in Europe, it is significantly higher at $18 per kWh. Spain, along with the Nordic countries, offers some of the cheapest electricity in Europe, making it an attractive location for data center development. However, securing access to the power grid remains a major bottleneck, as many European countries lack the centralized energy sourcing and exchange systems found in the U.S. This means that, despite high demand, bringing new supply online is increasingly difficult.
The scarcity of supply will benefit existing asset owners, as those who already have access to power and infrastructure will be in a strong competitive position. This is particularly relevant in Europe, where regulatory and energy constraints have already limited new development in major hubs like Dublin and Amsterdam. As a result, investment is shifting towards Tier 2 markets, including Madrid, Zaragoza, and Bilbao, where Spain is gaining a competitive edge.
Another key topic addressed was the regulatory hurdles, which make it even harder to bring new data centers online. In Europe, the average time to market for a new data center is 36 months, meaning that existing facilities will continue to benefit from high demand and limited supply for the foreseeable future.
The role of Public Authorities and market positioning
Carlos Portocarrero, Partner at Clifford Chance, shared insights on Spain’s growing role as a European data center hub, citing recent major transactions in Zaragoza in which the law firm was involved. He emphasized the unprecedented level of support from regional authorities, including declarations of public interest, workforce training initiatives, and infrastructure collaborations. Such efforts aim to position Spain as a key player in the European market.
However, he cautioned that data centers are not a sector open to every investor due to the high level of expertise required. "A lack of technical knowledge can lead to costly mistakes, making it essential for investors to work with experienced operators".
Carlos Portocarrero also addressed the ongoing debate about whether data centers should be classified as real estate or infrastructure assets. He argued that data centers differ from traditional infrastructure, such as bridges or roads, because they can be repurposed for alternative uses. Additionally, infrastructure investments tend to be long-term and conservative, whereas data centers carry a higher risk profile. For now, he concluded, "it makes sense to categorize them as real estate".
The Shift from CapEx to OpEx
Another analyses key trend in the data center industry relates to the shift from capital expenditures (CapEx) to operational expenditures (OpEx). Businesses, including large corporations, are increasingly moving towards an "asset-light" model, outsourcing their data center needs to specialized operators. Fernando Abril-Martorell, Partner Equity Research at Alantra Equities, argued that this shift is driven by the high costs and complexity of running a data center, which requires significant upfront investment, ongoing technology upgrades, cybersecurity measures, and highly specialized engineers, who are in short supply.
Specialized data center operators benefit from lower capital costs and economies of scale, making outsourcing a more cost-effective option for companies. Some of the cited examples were Amadeus and Marriott, two companies from the traveling and hotels segments which have formed partnerships with companies like Microsoft to enhance their data systems rather than investing directly in infrastructure.
On what concerns to the challenges associated with financing data centers, one of the most demanding times is the development phase. One of the biggest hurdles is gaining access to the power grid, which can take up to five years. This long timeline effectively excludes funds that operate on short investment cycles. However, he noted that, overall, financing conditions for data centers are not drastically different from other asset classes.
"Financing is particularly difficult for new entrants due to two key factors. First, data center investments are highly capital-intensive, requiring around €10 million per megawatt. Second, unless a developer is a well-established operator, securing pre-leased agreements is nearly impossible. This limits their ability to obtain aggressive leverage, making a loan-to-cost (LTC) ratio of 40-60% a reasonable target for the development phase".
Once a data center is built and tenants are secured, the financing outlook improves significantly. Data centers typically sign long-term lease agreements of 15 years or more, with fixed escalators. Tenants, often cloud operators or large AI firms, generally have strong credit ratings. This stability allows for higher leverage, with loan-to-value (LTV) ratios in the range of 40–50%. At this stage, the value of the asset significantly increases due to the steady rental income.
Fernando also pointed out that "while rental income projections are relatively clear, future operating and capital expenditures remain uncertain. Despite these uncertainties, equity markets are still open to data center investments". He cited Merlin Properties recent success in raising €920 million to finance a €2.1 billion CapEx project, achieving approximately a 50-55% loan-to-cost ratio. Once operational, this should translate into a 25% loan-to-value ratio, providing additional financial flexibility for future investments.
Overall, the Alantra Equities Research Partner emphasized that while data centers require substantial upfront investment and patience, well-structured projects with strong tenants can achieve attractive financing terms and long-term stability.
The critical dynamics of the leasing markets were the last topic addressed in the conference, underlying how pricing and operating expenses impact valuations. The private sector leverage is significantly high, making it more vulnerable to downturns. However, even if a downturn occurs, this would create opportunities for low-leverage investors to acquire assets at lower prices. Referencing Jevons’ Paradox, technological advances that improve efficiency tend to increase demand rather than reduce it, implying that concerns about reduced usage due to efficiency gains may be overstated.
Furthermore, concerns about physical space reduction were dismissed, as tenants primarily rent based on power usage, not square footage. Besides, more efficient data centers often lead to higher pricing power. “Regarding historical growth rates, where early U.S. data center expansion was around 2–3% annually, Europe is currently experiencing growth of around 6–7%, thus resulting in a significant supply-demand imbalance in Europe, where vacancy rates in top cities have dropped from 20% to below 10%, strengthening owners' pricing power”, Jacques Perdrix noted.
On valuation, Jacques discussed how investors must consider obsolescence costs. He mentioned that in the U.S., the typical accounting lifespan of a data center asset is about 20 years, with significant maintenance investments required after 8-10 years. Specifically, battery replacements are a minor cost, while chillers and cooling systems require significant reinvestment after 10-15 years. To manage these costs, US landlords typically set aside around 20% of their net operating income yearly to address obsolescence over time.
Closing on a positive note, the panel revealed that modern buildings are designed more intelligently, with dual backup systems that enhance reliability and reduce future obsolescence costs. While initial construction costs may be higher, these advancements may mitigate long-term capital expenditure requirements. The overall approach to valuation should include discounting potential returns to account for these hidden costs, ensuring sustainable investment strategies.
