The Real Estate of Data Centers: A High-Level Investment Perspective

Location Is Just the Start

Traditional real estate factors like location and land cost still matter, but in the world of data centers, power availability and network connectivity now dominate site selection decisions. Prime regions like Northern Virginia, Dallas/Fort Worth, and California's Silicon Valley have become data center hotspots because they combine dense fiber infrastructure with access to massive, reliable power supplies.

However, California investors face a unique set of hurdles. In Santa Clara, data centers already consume over 60% of the city's electric load, leading to power constraints and multi-year delays for new hookups. Meanwhile, creative solutions like the Stockton1 floating data center show how developers are innovating around land and infrastructure limitations. Elsewhere in the state, emerging hubs like Sacramento and the Central Valley are gaining traction due to lower land costs and access to renewable energy corridors.

Understanding the Investment Model

Data centers operate under diverse leasing structures. Large "hyperscale" facilities are often owned or leased long-term by tech giants like Amazon, Google, or Microsoft. Multi-tenant "colocation" centers, on the other hand, rent rack space and power to numerous smaller clients. In either case, rental income is often structured per kilowatt of power rather than per square foot, reflecting the mission-critical nature of uptime and performance.

Capital has flooded into the sector. Public REITs like Equinix and Digital Realty have delivered strong returns, while private equity giants have executed multibillion-dollar acquisitions. In 2023-24, cap rates for stabilized institutional-quality data centers hovered around 5-6%, demonstrating strong investor confidence even amid broader market volatility.

In fact, data center REITs were among the best-performing asset classes in early 2024, rebounding more than 10% year-to-date, while traditional office and retail REITs struggled to recover. The sector's combination of long-term leases, low vacancy rates, and structural demand growth makes it especially attractive in uncertain macro environments.

The Power Problem

A key risk across all markets — and especially acute in California — is power availability. The U.S. Energy Information Administration projects that data centers could consume up to 14% of total U.S. electricity by 2030, up from about 4% today. In California, tight power grids and environmental regulations add further pressure. New developments often require significant upgrades to substations or even partnerships with renewable energy projects to secure clean, reliable electricity.

Santa Clara and other Northern California markets are now facing delays of 2–4 years just to connect new megawatt-scale loads to the grid. Utilities like PG&E have extensive backlogs of power delivery requests, and this is reshaping how developers evaluate feasibility and location strategy.

Investors should be aware that permitting hurdles, particularly under California’s CEQA laws, can introduce multi-year delays. Recent high-profile projects in Los Angeles and the Bay Area have faced lawsuits and community resistance, adding layers of complexity to an already challenging development process. However, these barriers can also serve as a moat—limiting competition and making well-positioned, entitled sites in California even more valuable.

Emerging Trends and Markets

While Silicon Valley remains a marquee market, secondary locations within California are gaining traction. Areas like Sacramento, the Central Valley, and parts of the Inland Empire are emerging as alternative hubs where land is more affordable and renewable power integration is more feasible.

Outside California, markets like Northern Virginia and Texas continue to dominate. Virginia, in particular, boasts over 4,000 megawatts of installed capacity, more than five times that of Silicon Valley. Its combination of lower power costs, strong incentives, and robust fiber infrastructure has made it the world’s largest data center market. Texas, while growing rapidly, carries unique grid challenges due to its independent ERCOT system but remains appealing due to land availability and low development costs.

Meanwhile, nationally, the rise of edge computing and AI-driven workloads is reshaping the sector. AI servers demand significantly higher power density, prompting retrofits and new designs that prioritize cooling efficiency and energy management. Hyperscalers are now pre-leasing entire data center campuses years in advance to meet the surging demand from AI and machine learning applications.

The Bottom Line: Opportunity Meets Complexity

Data centers offer strong, resilient cash flows tied to the unrelenting demand for digital infrastructure. But they come with a steep learning curve: power, permitting, network access, and sustainability are now critical underwriting factors. California, with its high barriers to entry, presents both significant challenges and outsized rewards for those who navigate it well.

For investors looking to move beyond traditional commercial real estate, data centers represent a compelling frontier — but one that requires careful due diligence and specialized expertise.

This is where qualified real estate appraisers come in. Proper valuation of data centers demands a hybrid understanding of land, infrastructure, technology, and income streams. As this sector matures, the need for sophisticated, experienced appraisers will only grow, ensuring investors have the insights necessary to succeed in this complex but promising market.

For more info, a great resource is CBRE’s Market Report