As technologies like artificial intelligence and digital currencies grow in importance, so will the hardware needed to support them.
In a recent note, the ratings agency said that demand for data centers is set to keep increasing over the next half-decade or so as firms scale their technological capacities.
“Data center demand will continue to surge over the next few years, driven by cloud services, AI-related requirements, cryptocurrencies and other uses within the continually expanding digital economy,” a team led by Moody’s Senior Credit Officer Ranjini Venkatesan wrote in the July 23 note.
“Despite rapid growth in data center capacity in recent years, it has been unable to keep pace with surging demand,” it continued. “We forecast that data center capacity will need to more than double by 2028 to meet our unconstrained forecast for power consumed by data centers.”
Data center real-estate investment trusts are therefore well-positioned to benefit from the growing need, Moody’s said.
Two in particular sit at the top of Moody’s list of REITs to watch: Digital Realty (DLR) and Equinix (EQIX).
That’s due to several factors, including the firms’ longevity—both are over 20 years old. This allows them to capitalize on existing relationships with firms like Amazon, Google, Microsoft, and others, the note said.
The two companies also have diversified client bases by size and don’t rely solely on Magnificent Seven companies. Digital Realty’s 10 largest clients make up just under 40% of revenues, and Equinix’s make up less than 20%.
Moody’s
Revenues are also diversified geographically, with less than 60% of sales coming from the US for both companies, and revenue from the Asia Pacific region expected to grow.
Moody’s
This geographic diversity also helps Digital Realty and Equinix, as they already have data centers worldwide. This gives them a leg up on privacy laws in places like the European Union, for example.
“In particular, countries with data privacy and sovereignty rules will require data to be processed and stored within their borders rather than one remote centralized location,” the note said. “Therefore, hyperscalers will maintain data center capacity in more locations than in the past. Also, both Digital Realty and Equinix have diverse tenant rosters and long-standing relationships with many hyperscalers.”
In addition to Digital Realty and Equinix, Moody’s pointed out three other REITs that aren’t primarily in the data center space but are investing in it.
One includes American Tower Corporation (AMT), which bought CoreSite, a Los Angeles data center firm, in 2021. Another is Prologis (PLD), which just announced that it’s building 20 data centers in the next five years for around $7-8 billion, Moody’s said. Iron Mountain Incorporated (IRM) is another firm investing in the space, the note said, evidenced by its data center revenue growing to 10% in Q1 2024 versus 8% two years prior.
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