Warehouse Developer Panattoni Plans Data- Center Push, Sparked by AI Boom
Thursday, August 1st 2024
One of the largest industrial real-estate developers in the U.S. plans to begin developing data centers as an artificialintelligence
boom drives demand for the specialized buildings.
Panattoni Development said Thursday it hired a partner, Adam Kramer, to lead a team that will build and operate data centers across North America. The Irvine, Calif.-based company said it plans to develop a gigawatt of datacenter capacity over the next five years, the equivalent of what it takes to power about 876,000 homes.
Kramer previously was chief executive of carbon-emissions management platform nZero and an executive at technology infrastructure provider Switch.
Panattoni, a private company that has developed 625 million square feet of industrial, office and retail space globally and whose tenants include retailers Amazon.com and Best Buy and consumer-goods maker Unilever, is the latest developer to see an opportunity in the warehouse like buildings that house the internet. Demand for the facilities has surged alongside interest in generative artificial intelligence and machine learning technologies as well as demand for cloud computing.
“You want to be where the customer is, and right now the customer wants to be in the data-center world,” said Doug Roberts, president of Panattoni’s North American development group.
Roberts said the developer aims to build data centers on land it owns as well as purchase new properties. Buildings will range in size from 100 megawatts to 500 megawatts of capacity.
Tech giants such as Google, Microsoft and Amazon Web Services have rushed to lease, buy or build space over the past four years to power everything from generative AI chatbots to apps, emails and photos stored in the cloud.
Companies leased nearly three gigawatts of data-center capacity in North America in the first half of this year, up from 1.4 gigawatts in the first half of 2023, according to research firm datacenterHawk.
The growing demand has attracted big investment to the sector. Blackstone said on an earnings call in July that its data-center portfolio is worth $55 billion including facilities under construction, with a pipeline of more than $70 billion of prospective development. Amazon earlier this year said it plans to spend more than $100 billion over the next decade on data centers.
Prologis, the world’s largest industrial real-estate operator, also plans to begin building data centers. “Every time we convert a warehouse to a data center, we pick up lots of value, like $500 a foot of value,” Prologis Chief Executive Hamid Moghadam said.
Capacity in North America’s largest data-center markets such as Dallas, Chicago and northern Virginia increased 26% last year from 2022, according to commercial real-estate services firm CBRE. The sector has some 98 gigawatts of new capacity in the planning stages and expected to come online over the next decade, datacenterHawk said.
Still, there are challenges to building the facilities. Data centers are expensive to develop compared with warehouses and require access to huge amounts of power to run and cool the servers, routers and other hardware inside, said Pat Lynch, head of CBRE’s global data center solutions group.
“It’s a significant investment; it’s a very specialized investment,” Lynch said. “There’s a lot of risk that goes into that build-out.”
Other commercial real-estate sectors have suffered declining valuations due to high interest rates and sagging demand. Remote work has slashed the need for office space, and online shopping has dented demand for retail space in malls.
Industrial real estate has remained strong, with rents climbing even as leasing has slowed over the past two years as companies grow into space they leased during a pandemic-era race to extend logistics networks.
Panattoni’s Roberts said the increase in demand for data centers reminds him of the shift in industrial real estate over the past two decades away from traditional distribution centers that restocked stores toward e-commerce fulfillment centers that ship individual packages to customers.
“We had to learn that sector and said, ‘We’re going to take that on and figure it out because that’s what our customers want,’” Roberts said. “This is no different. The data centers present an opportunity.”