Chart of the Week

As artificial intelligence (AI) investment and implementation have accelerated, data-center real estate investment trusts (REITs) have experienced unprecedented demand. Larger data-center REIT’s income sources are often diversified by a range of offerings, and we see colocation and interconnection as particularly notable features of the business.

Colocation allows multiple tenants — ranging from hyperscalers to smaller enterprises — to operate within the same facility. As illustrated in the chart, on average, colocation data centers generate higher stabilized net operating income yields and represent higher average development profit martins compared to hyperscale data centers. Meanwhile, interconnection enables lower-latency connections and translates to higher tenant retention.

We are favorable on the Data Center REITs sub-sector as we believe it possesses durable growth prospects, attractive margins, and solid pricing power. We also view the sub-sector as an attractive route for gaining exposure to the AI theme within the Real Estate sector, particularly as AI use cases continue to expand and support sustained demand and pricing power.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions. Other risks associated with investing in listed real estate investment trusts (REITs) include the use of leverage, unexpected reductions in common dividends, increases in property taxes, and the impact to listed REITs from new property development.

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