Real estate stocks and related ETFs recently got a much needed positive jolt when the Federal Reserve lowered interest rates in September. The sector’s rate-sensitive status isn’t going anywhere. But smart investors assess other factors affecting the sector.
Those include the ability of the commercial office space to rebound, demand for industrial warehouses, the regulatory environment for residential apartment starts, and data centers. Focusing on data centers, those properties are in big demand thanks in large part to the artificial intelligence (AI) boom. That indicates ETFs such as the ALPS Active REIT ETF }% etf REIT %} have credibility as backdoor AI plays.
Regarding tapping real estate as an avenue to AI, REIT could be a standout among real estate ETFs. That’s because the ALPS fund is actively managed. That implies a level of flexibility not found with index-based strategies. That indicates REIT can more swiftly increase data center exposure than can passively managed rivals.
REIT Could Be Data Center Winner
AI-driven demand is one indication of REIT potentially being at the right place at the right time when it comes to participating in the nontech side of the AI trade.
“Projects are increasingly large and numerous, with significant investments and project management as key constraining factors,” noted S&P Global Ratings. “These include securing large industrial land plots in the right areas to accessing and securing significant power needs. This trend has not driven any material rating actions so far, but risk appetite could curb companies’ overall credit profiles.”
Thanks in part to the cloud computing, data centers have already experienced significant expansion with the 2024 U.S. Datacenter and Energy Report indicating data center capacity grew by 10 gigawatts from 2017 through 2022. However, AI-related data center needs will far outpace that growth.
“We expect nearly 50 GW of utility power capacity to be added from 2023-2028. A record number of new leases were signed in the first half of 2024, with the bulk of the demand in the U.S.,” added S&P.
That could bode well for publicly traded data center equities as could leasing trends in the space. After all, many of the tech companies involved with AI find it more efficient to lease data centers than to fight for purchases of that real estate. That could signal long-term demand for data center real estate investment trusts as well as potential pricing for those firms.
“This should result in positive re-leasing spreads and low vacancy. Microsoft Corp.’s 2024 annual report indicated an additional $8.6 billion of operating leases and $108.4 billion of finance leases, primarily for data centers, in the next five years, with lease terms of 1-20 years,” observed S&P.
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