The U.S. data center market is slated for massive expansion, with investment volume predicted to reach $1T by 2030.
Driven by increased data consumption and advancements in artificial intelligence, some of the world’s largest technology companies, such as Metaand Google, are making waves in the space — unveiling plans to construct billionsof dollars worth of data centers across the country to keep pace with demand.
Data centers haven’t only caught the attention of tech gurus, however. Commercial real estate professionals are also highly optimistic about the sector's future.
Worldwide, there are more than 50 real estate fundsactively looking to invest in data centers. This suggests that investors’ appetites are growing for the sector and aren’t likely to slow down any time soon, said Yelena Nersesyan, real estate counsel in the New York office ofLinklaters, one of the world's leading law firms.
“Governments around the globe are recognizing the importance of digital infrastructure and are providing, or making effortsto provide, some incentives or funding or favorable regulations,” said Nersesyan. “This is creating a favorable environment for investors.”
Linklaters has a global and expanding presence in thedata center market, advising on $136B in global digital infrastructure deals in 2024. The firm recentlywon five awardsin the European market for its work in the sector, including the Europe Data Centre Deal of the Year and Legal Advisory Trailblazer for “advising Vantage Data Centers on its €2.5B investment partnership with a consortium of investors” —a deal that relied on the strength of its teams across Linklaters' global offices.
Through her work at Linklaters, Nersesyan has advised on the real estate aspects of several deals in the digital infrastructure space. Bisnow spoke with Nersesyan about the top three considerations investors should take into account when exploring data center properties as their next investment.
Site Selection, Access and Real Estate Legal Due Diligence
When selecting a site to build a data center, examining the title, conducting a survey, determining if consents, permits and licenses are needed from third parties, includinggovernment agencies, are all crucial itemsto take care of, Nersesyan said. Additionally, depending on the deal structure and document availability, reviewing and negotiating power studies and utility service agreementsand negotiating leases and co-location agreements are some of the most important due diligence items that investors and their advisers should consider.
Examining the Title and Conducting a Survey:Occasionally, properties come with ownership questions or disputes that may not be clear immediatelybut could be disastrous if they are realized too late. This is why examining the title and conducting a survey is essential, she said.
“With this, we can visualize whether any documents recorded against the property, such as restrictions, utility easements or other similar documents, could potentially interfere with the proposed development,” Nersesyan said. “Access to ample power sources is also a top priority when evaluating the site location, so locations that are close to apower gridor have quick access to power are in high demand.”
Determining Consents: For the proposed development of a data center, obtaining third-party consents might be necessary for transferring existing agreements related to the property, Nersesyan said. Additionally, depending on the specifics of the development, assignment of existing permits, licenses and approvals issued by government agencies, or obtaining new ones, could also be required.
“Having a legal team that understands the changing landscape and can advise on potential hurdles and opportunities arising from them can make a big difference,” Nersesyan said.
Obtaining a Power Study and Utility Service Agreements: In many cases, purchase contracts can be contingent on obtaining a power study and utility service agreements, Nersesyan said. These studies can take time, but they are needed to understand a property’s connectivity, what resources the local utility company can provide and whether or not they will be sufficient for constructing and operating a data center.
“We want to make sure that all these details — obtaining a power study, utility service agreements and appropriate licenses, permits and approvals — are incorporated into a contract so our clients are protected,” she said.
Negotiating Leasing and Co-Location Agreements: Leases and co-location agreements are also key components of data center deals, allowing businesses to utilize specialized facilities for their IT infrastructure needs, Nersesyan said. Leases and co-location agreements are fundamental to the financial health and growth prospects of data centers, offering benefits of stability, flexibility and a technological advantage to both operators and tenants.
Regulatory and Compliance Requirements
Constructing a data center also involves examiningwhether the local zoning laws permit such use. Zoning laws vary on a county and citylevel, making it imperative to engage with local specialists who know the nuances of a given market, Nersesyan said.
There are many counties, in Northern Virginia, for example — one of the largest data center development areas — where local governments are reviewing the current zoning laws and adopting new resolutions, she added.
In the past, local authorities didn'texamine zoning regulations regarding data centers specifically because they were not in such high demand, but this is now a subject commanding attention.
Many proposedproperty sites are located in rural areas, a good portion of which were farmland. Now that larger swaths of this agricultural land are being consideredfor “special use,” zoning regulations are evolving quickly, she said.
“In some cases, zoning laws are being altered to be more beneficial to investors. But in some cases, depending on the region, local authorities may not want their agricultural land to be turned toalternative uses,” she said.
Energy and environmental regulations are also important, given that data centers have a large environmental footprint,Nersesyan said. Along with the large amount of electricity these centers consume comes the need for large-scale cooling measures — using cooling towers, air conditioning or liquid coolants to maintain proper temperatures for building and equipment efficiency.
“Stay on top of those changes, especially with the energy and AI regulation changes now,” she said. “A lot of what people were following last year may have been affected by various resolutions that have beenimplemented or signed, so make sure to revisit all the analysis that’s been done in the past year or two."
Financial and Technical Feasibility
Investors considering data centers should conduct a thorough financial analysis to determine the cost-effectiveness of the proposed development, Nersesyan said.
As a “high barrier to entry” market, there are significant costs associated with data center investments. A data center’s core and shellcost can vary anywhere from $125 per SFto more than $200 per SF. In addition to the heavy cost of equipping the building with the correct IT infrastructure, these structures can cost hundreds of millions, if not billions, of dollars.
Taking the time beforeentering into a definitive purchase contract to carefully assess these technical requirements and costs associated with inevitable scalability can reveal whether or not the project is feasible, she said.
This article was produced in collaboration between Studio B and Linklaters. Bisnow news staff was not involved in the production of this content.
Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.
