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Playing both sides: How logistics real estate firms are moving into data centers

Despite a boom in their home turf, logistics real estate players are moving into building data centers

May 31, 2022 By Dan Swinhoe

For a long while, private equity investors have invested in both digital infrastructure and industrial real estate. Now, logistics-focused real estate firms are beginning to eye up the data center industry as an opportunity for growth.

Despite an e-commerce-driven boom in logistics, these firms are playing both sides and looking to tap into the burgeoning data center sector at the same time in an effort to grow further, even if both sectors might have competing demands for the same sites.

Big players in logistics and industrial real estate, like GLP, Prologis, Segro, and ESR, are looking to data centers, many of them partnering with established data center players to use available facilities and land for both brown- and greenfield developments.

Boom times for both data centers and logistics

Both data centers and logistics are benefitting from the same underlying trends, but competition may be tight.

After pent-up demand due to Covid, the logistics, industrial, and warehouse real estate space is enjoying a boom. In February 2022, Prologis said vacancies are at record lows across the globe and high demand is leading to ‘bidding wars’ and global rent increases of around 15 percent.

Another report from October 2021 said that “space is effectively sold out.” Despite huge amounts of speculative building, pre-lease rates are around 70 percent, the company said.

As with data centers, warehouse construction costs have been driven up by increasing land, material, and labor costs, but that hasn’t stopped many of the large real estate firms in the sector posting healthy profits.

CBRE says that each $1 billion in e-commerce sales needs an additional 1.25 million sq ft (116,000 sq m) of distribution space to support it. Prologis estimates a five percent increase in inventory levels would require an additional 300 million sq ft (28 million sqm) of industrial space, while JLL predicts demand for industrial real estate could rise by an additional 1 billion sq ft (93 million sqm) by 2025.

At the same time, work and personal lives are being increasingly digitized, producing an ever-increasing amount of data, and driving data center demand to record highs. The biggest data center markets in the US absorbed 493MW of capacity in 2021, setting a new record 31 percent higher than the previous record year, according to real estate specialist CBRE. Gartner predicts that the data center market will grow year-over-year through to 2024.

The fact that e-commerce giants AWS, Alibaba, and JD.com are major players in both sectors shows their potentially synergistic nature.

As both industries continue to heat up, this is leading to increased competition for land and power. DCD has previously reported that in major markets where the data centers are historically located close to distribution facilities, rents, and land acquisition costs are being driven up by high demand and low availability.

Earlier this year, a former Speedcast data center in New York was bought for $21 million by a Blackstone-backed logistics firm that plans to demolish the facility to build a new distribution center.

In Staffordshire in the UK, a former Royal Bank of Scotland data center is due to be demolished and replaced with a new warehouse by logistics firm PLP. A former Fidelity Investments data center in Irving, Texas, was last year turned into an industrial space and sold.

Logistics companies want data centers

Despite the e-commerce boom, logistics-focused real estate firms are increasingly eyeing the data center industry as a growth opportunity.

A planned Skybox data center in Texas being built on Prologis land

APAC logistics firm Logos last year announced a partnership with Pure Data Centers to develop data centers across Asia Pacific. Logos owns, develops, and leases logistics properties across Australia, China, Singapore, Indonesia, Malaysia, Vietnam, India, and New Zealand. The two companies have announced plans to build a new 20,000 square meter (215,000 sq ft), 20MW data center in Jakarta, Indonesia.

Pure had also been planning a similar move with Panattoni in the UK. The two companies were aiming to develop a three-story, 41,763 sqm (449,500 sq ft) data center due to offer up to 50MW of capacity on the site where the logistics firm had already started developing warehouse space. The plans were later dropped, though DCD understands this was due to extended timelines around connecting the proposed facility to the power grid.

Hong Kong-based real estate company ESR Cayman, traditionally focused on logistics, has made a number of moves into the data center space since 2021. In April 2021, the firm announced it was buying a data center in Osaka, Japan, which it plans to expand into a 78MW campus. It has since bought a building in Hong Kong to convert into a 40MW data center, saying the expansion was “a natural move” for the company. It went on to acquire ARA Asset Management, including Logos.

Today, the firm’s data center portfolio consists of six owned development assets totaling 260MW across Hong Kong, Osaka, Sydney, Mumbai, Jakarta, and Singapore. In its 2021 annual results, ESR said data centers were a “key strategic focus” for the company going forward.

“With the closing of the ARA acquisition which brings together Logos to form a multi-pronged platform, the enlarged ESR Group has a combined data center pipeline of over 1,200MW of capacity across the region,” the company said.

“E-commerce acceleration and digital transformation will continue to drive demand for logistics infrastructure and data centers.”

Singapore-based logistics real estate firm GLP – a major player with $120 billion in assets and managing more than 75 million square meters of real estate – has been investing in data centers since 2018, and claims that its assets, including those under construction, will deliver about 2,500MW of capacity across China, Japan, Brazil, and Europe upon completion. In 2019, GLP acquired a 60 percent stake in local data center company Cloud-Tripod.

In Spain, logistics-focused real estate firm Renta Corporacion is building a data center in Barcelona, and Merlin is building a number of facilities across the Iberian region.

Last year, US real estate investment firm PRP said it was diversifying away from office properties and had set a goal of spending $2 billion acquiring logistics and data center properties across the country.

Goodman Group – again largely focused on warehouse and logistics-type real estate – is listed by French data center builder Cap DC as a ‘key partner,' especially in markets such as Frankfurt, Paris, Amsterdam, Milan, and Madrid. The company has also partnered with STT GDC for two facilities in Tokyo, Japan.

Segro is traditionally focused on warehousing and light industrial properties, but also manages the UK’s main data center clusters at its Slough Trading Estate. It recently bought an additional 1 million sq ft of nearby office space it plans to convert and merge into the trading estate as more data center space. Equinix, Virtus, IO, and KKR’s Global Technical Realty all use Segro facilities.

Prologis has partnered with Skybox Datacenters in the US (see Box) and in the UK has previously supplied Virtus with land to develop a data center at Stockley Park outside London that was previously earmarked for a warehouse.

What’s the appeal of partnering?

A cold storage facility ESR is converting into a data center

Amid a competitive market where land and power can be difficult to source in constrained markets, data center operators are always looking for ways to deliver projects in key markets quickly.

“It is quite a difficult market to get into,” says Tom Glover, head of data center transactions, EMEA, JLL. “The significant amount of capex you require to create a data center is still a barrier for a lot of companies despite the amount of capital out there.

“Supply and demand, and speed to market are drivers here. It's difficult to find the right pieces of land and the warehouse logistics marketplace has been for a long time buying land to develop it for industrial logistics uses. Their proposition is ‘we'll get it there quicker than you can probably do it on your own.’”

As a result, he says, large logistics companies offering data center operators potential facilities could create an appealing proposition.

“If you've got a shed that you can bring power into, get the relevant permitting permissions to put a data center there, and the market agrees it's in a good location, it's going to be very appealing for an operator to explore taking a long-term lease on the site.”

“It will never be a short-term lease, because of the amount of investment that the operator will be putting into the ground.”

Glover says he would be surprised if companies like Prologis, Segro, and others don't look at exploring the “cookie-cutter effect” of providing power shells in other markets in the future.

“I can see that still being a business model they will look to benefit from,” he says. In major markets where there is little available land, relying on a partner that has a sizable portfolio of land and potentially convertible facilities could be appealing. However, in Edge or secondary markets where there is less fiber or pressure around available land, such partnerships may not be as necessary.

“In markets with high demand and limited supply, ergo very strong business case, this can be interesting to operators,” says Glover. “In markets with medium demand and a high supply of potential space, I think there's going to be a harder sell unless they have good relationships that they formulated in those major marketplaces.”

Most of the above-mentioned partnerships are focused on using the logistics firms’ landbanks rather than developing facilities in existing buildings, but operators might appreciate the ESG benefits of retrofits. Serverfarm calculates that reused existing buildings can deliver embodied carbon savings of 88 percent compared with the material carbon cost of new projects.

“This offers another string to that bow of development. It would be unwise not to at least consider the idea of potentially
working in a partnership with a logistics provider of sheds,” says Glover. “Anybody that is a landowner of suitable property is going to find that those symbiotic relationships will evolve.”

“Most operators prefer to own their own freehold,” he adds. “And for some operators, [such partnerships] won't be a path that they will ideally go down. But the quid pro quo is they accept that they may not be able to deliver product to a marketplace as quickly as they would like.”

Prologis moves into data centers with the help of Skybox

Prologis, the largest industrial real estate company in the world, owns more than 4,000 buildings spanning almost 1 billion sq ft across 19 countries in North America, Latin America, Europe, and Asia. Though it is the dominant force in warehouses, the company is also starting to make moves into data centers.

In the US, Prologis has partnered with Skybox Datacenters. In early 2021, the two companies filed to convert an empty warehouse owned by the real estate firm into a data center in Elk Grove, Illinois. In December, Prologis filed for permission to develop a new 500,000 sq ft (46,500 sqm) data center on a 19.5-acre industrial site that it currently owns in Sterling, Virginia.

Additional filings suggest Prologis was again partnering with Skybox Datacenters for the project, though the companies haven't confirmed this yet. And in March 2022, the two companies announced plans for a greenfield 30MW, 141,240 square-foot (13,100 sqm) data center on Prologis land in Austin, Texas.

On its website, Skybox lists the partnership as ‘Skybox, Powered by Prologis.’ R. Haynes Strader, Jr, chief development officer at Skybox, says Prologis wanted a data center partner that could “come in and help them activate real estate that they owned as well as identify new opportunities.

“For over a year they interviewed a number of data center operators, from small private groups like Skybox all the way up to some of the largest REITs in the world,” he says. “For North America, they selected Skybox. We did an exhaustive study of a number of their sites, and the original process resulted in the identification of an opportunity in Chicago and so that was our first project with them.”

Though the arrangement of each project is different, broadly Prologis is the majority partner in a joint venture which owns the land or property, while Skybox works on the development, marketing, and operation of the resulting data center.

“The concept is using the strength of Prologis' real estate portfolio, general expertise, as well as their balance sheet, to drive fast data center developments in very tight markets where they control real estate,” says Strader. “Skybox brings the expertise around data center development, power delivery, marketing for data centers. And then we also operate data centers, so we can offer a full package solution to an end-user.

“What Prologis can uniquely offer that few others can is many dots on the map in some of the tightest markets in the world.”

Haynes says that both companies are aiming to be flexible, looking at greenfield and brownfield developments, both speculative and build-to-suit.

He notes that while not under an exclusive partnership, the company is focusing solely on developing through Prologis at the moment, and believes it could yield “two to five” development opportunities in the US per year.

“We're mostly focused on larger wholesale type users. Prologis already has relationships with a lot of the large end-users from an industrial standpoint and Skybox typically has relationships from a data center component. It's a partnership combining strengths to create a unique opportunity.”

In terms of stability and security, Haynes claims that having assets backed by Prologis, a company with a market cap of $121.9 billion, offers more security. That is much bigger than the largest data centers players, Equinix and Digital Realty (market caps at time of writing; $64bn and $41bn respectively).

“Prologis are larger than any data center [firm] in the business, so from a financial perspective for a customer, there's more security doing a deal with Skybox & Prologis than you would find with any other operator in the world.

When asked if there could be competing priorities as to where Skybox may want to build vs where Prologis may be willing to put up land or property, Haynes says the decision remains in the hands of the real estate firm, but says the company has been “very open” to considering opportunities.

“They have a rigorous analysis process that is applied. For us, the key is understanding where there are opportunities that are relatively low impact to the industrial relationships that they have, yet high impact for the data center. And with the amount of real estate that Prologis has, there are ample opportunities to do that.”

Another benefit, according to Haynes, is Prologis’ clout in the supply chain, and the benefit that can bring to getting projects done quickly. “They have incredible expertise in the development of industrial buildings and the procurement of key components: when we're ordering steel and concrete and roofing materials etc, Prologis' supply chain access and leverage is tremendously higher than most other data center users.

“They're able to get timelines expedited, they can order things speculatively. A lot of companies couldn't do that, but they can always reposition it elsewhere in the portfolio.”

“Prologis is the 800-pound gorilla in the room. Skybox is certainly fortunate to have the partnership that we do with them here in the United States.”