Data Centers in U.S. Securitization: A Primer

KBRA releases research that provides an introduction to the data center industry in the U.S. and the role of securitization in financing the industry. The report discusses trends in the data center industry, the different types of data centers, as well as their varying operational and financial profiles, and the securitization structures that have been used to provide financing in the space.

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Data center traffic has been growing at a CAGR of 28%, driven by applications such as 5G, artificial intelligence (AI), the Internet of Things (IoT), and a shift in corporate IT activity to off-site facilities. This increase in traffic resulted in a record year in 2022 for both absorption and construction, record low vacancies, and accelerating rent growth. However, after several years of seemingly unimpeded growth, new construction in the data center sector is facing significant headwinds for the first time in the form of power limitations in some geographies and a backlash from local governments that previously welcomed data center development. As a result, data center growth in secondary markets is expected to accelerate, driven both by land and power shortages that have emerged in primary markets and a shift to edge computing.

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The report describes the three major types of data centers—hyperscale, enterprise, and retail colocation—that are classified by their size (power generation capacity), the number of users, and users’ power requirements, respectively. Further, the data center types also vary in terms of lease structures and operational intensity. The research compares cash flow and valuation profiles across the data center types as well as across other commercial real estate asset classes. Finally, the report provides a brief overview of data center financing structures and volume within the U.S. structured finance space, as well as the asset class’s sustainability footprint.