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Cantor Fitzgerald Sees Data Center REIT Sector 'Maturing'

Posted by Jeffrey Mayer on March 16, 2015
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On Monday (March 5, 2015), Cantor Fitzgerald released key takeaways from an interview with Bryan Loewen, executive managing director of the NGKF Data Center Consulting Group, regarding the U.S. data center landscape.
The Cantor Fitzgerald data center coverage universe includes:

  • Digital Realty Trust, Inc. (NYSE: DLR) – Sell rated; $61 PT
  • DuPont Fabros Technology, Inc. (NYSE: DFT) – Buy rated; $35.50 PT
  • CoreSite Realty Corp (NYSE: COR) – Hold rated; $38.00 PT

Tale of the Tape
No updates or price target changes were included in the Cantor Fitzgerald note.
Cantor Fitzgerald – Key Takeaways
The data center REIT sector is maturing and “likely entering into a phase of ‘productization,’ as landlords tailor their offerings to the ever-evolving tenant base.”
The Next Phase – Productization: Loewen is “seeing a noticeable increase in demand for ancillary services from enterprise tenants, as they look to further outsource IT requirements and better spend IT dollars.” Cloud service providers are the fastest growing vertical for wholesale data center space landlords.
Fundamentals: Most markets “continue to improve from the perspective of landlords […] Loewen expects to see rent levels continue to grow through 2015 due to the timing of the anticipated development deliveries.
“With regard to renewal spreads, the tenants’ level of expertise, as well as its usage of a broker […]30 – 40 percent of wholesale and 70 – 80 percent of retail leasing do not involve a broker, likely shielding the tenant from actual market conditions.”
Development: “Development activity is evident across all sizes, products and markets, though there are limited near-term deliveries. Notably, Mr. Loewen is seeing significant activity in second- and third-tier markets, as companies look to move from higher-cost markets into locations with lower overall costs and/or with proximity to their corporate locations.”
Transaction Activity: Buyer interest in data centers “remains robust and unchanged from last year, with private equity players being the most aggressive, and names like Carter Validus and GI Partners most frequently representing the winning bids.
“Cap rates continue to compress, averaging 6 – 7 percent for high-quality stabilized assets, approximately 25 – 50bps below year-ago levels. The increased interest in Data Center CMBS could push cap rates lower going forward, in Mr. Loewen’s view.”
Also Of Note: Loewen also mentioned AT&T having $2 billion of data centers for sale and his expectation of “increased M&A activity” in the space.

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