Demand for data centres is trending higher amid the expansion of AI and cloud services, according to one portfolio manager, who says some U.S.-based real estate investment trusts (REITs) will benefit. 

Sam Sahn, a managing partner and portfolio manager at Hazelview Investments, said in an interview with BNNBloomberg.ca last week that several factors are driving the demand for data centres. He points to enthusiasm for AI and the technology sector, as well as the amount of power required to run large language models.

“I think the important variable to think about (for) AI and data centers is the amount of power that's required to run large language models. These large language models require a significant amount of power in order to optimize, in order to run, in order to make efficient, and power is a finite resource,” Sahn said. 

According to a November 2023 report from Hazelview Investments, the data centre market was valued at US$263 billion in 2022 and could grow to $602 billion by the end of 2030. 

“So we've seen two trends happening in parallel. One is the conversion of companies around the world to the cloud, and that is still going on today. The other one is obviously what's happening around AI,” Sahn said, adding that the AI trend is only just beginning. 

He highlighted that during the COVID-19 pandemic, the data centre sector saw many investments to support work-from-home arrangements. Additionally, leasing demand for data centres comes from hyperscaler customers like Alphabet Inc., Amazon.com Inc., Apple Inc. and more. 

“All of this leads into demand, which is largely driven by the cloud, social media, gaming and now AI (and) is leading to vacancy rates rapidly declining around the world,” Sahn said. 

According to Sahn, there was previously strong demand in the market, but also a lot of supply. 

“What's happened now because of COVID-19 is higher inflation has led to higher construction costs, higher interest rates have led to higher financing costs,” Sahn said. 

“The combination of higher construction costs and higher financing costs have made projects more expensive, in order to justify new construction breaking ground, even though demand is strong, you need higher rents.”

Sahn’s comments come amid broader momentum gains for data center demand. 

Last week, Brian Venturo, the co-founder of cloud-computing company CoreWeave, said the world is “grossly” underestimating the degree to which artificial intelligence will drive data centre demand. 

“The market is moving a lot faster than supply chains that have historically supported a very physical business have been set up to do,” Venturo said during a Bloomberg Intelligence summit in New York. 

In January, the International Energy Agency said in a report that it is forecasting that global electricity demand from data centres could more than double over the next three years. In total, there are 8,000 data centres around the world, with around 33 per cent located in the U.S., 16 per cent in Europe and nearly 10 per cent in China. 

In March, Bloomberg News reported that Amazon plans to spend nearly $150 billion over the next 15 years on data centres. 

Impact on REITs 

Sahn said he sees increased demand for data centres putting upward pressure on some stocks. Specifically, he said certain REITs in the U.S. are well-positioned to benefit from increased data centre demand. 

He added that about 12-13 per cent of the portfolio he manages has exposure to the 

global data centre industry. 

One company Sahn highlighted to benefit from this trend is Digital Realty, an Austin-based REIT building wholesale data centres. 

“Equinix is another company that we believe that this trend applies to. That company owns the largest retail co-location data centre portfolio in the world,” Sahn said.

“They also have a development arm, where they develop wholesale data centres catering towards hyperscale customers under the umbrella of xScale project.”