Tech Adjacent: Leveraging the National Tech Buildout Beyond Data Centers

This rapid AI adoption is spawning the development of digital infrastructure to support AI applications.  Data centers are at the heart of this infrastructure buildout, as is cheaper and cleaner energy.

This transition is having a global impact. While the US is the largest market for data centers, accounting for roughly 40% of the global share, the market is growing around the world. In Europe, Latin America, and Asia Pacific regions, data center inventory grew between 15% and 22% year-over-year in Q1 2024.[ii]

Fundamentally, we are AI believers. J.P. Morgan (JPM) was an early adopter, and it’s already adding productivity benefits to our overall business, from chatbots to enhanced modeling. However, in our real estate portfolio, we don’t own data centers and prefer to own real estate that is adjacent to this digital infrastructure. Here’s why:

1) Data centers are not “real estate” in a classic sense, but more closely resemble infrastructure investments.

While traditional real estate is leased on a per square foot (PSF) basis, data centers are generally leased based on energy capacity (more akin to a utility). This pricing methodology intrinsically ties a data center’s value to the availability and need for power. More than 40% of US data centers are in Northern Virginia, where nuclear power is prevalent, and regulations have traditionally allowed data centers to connect to the power grid relatively quickly.[iii]  

Further, most of the value of a data center is the hardware inside, rather than in its physical location. According to Green Street, in the two years ending March 2025, the average industrial asset traded for $180 PSF, while the average data center traded at $514 PSF.

That puts traditional industrial assets at roughly a third of the cost of a data center, implying that approximately two-thirds of the value is in the hardware (e.g., power, cooling systems, etc.) as opposed to the real estate. This makes data centers more of a tech/infrastructure investment as opposed to pure-play real estate.

2) Technical obsolescence risk is high. With most of a data center’s value tied up in the power and hardware, owning one is more of a tech play than a real estate play.

In January 2025, DeepSeek, a two-year-old AI startup based in China, unveiled a new AI model that reportedly performed on par with leading US models. What was most interesting is that DeepSeek is ten times more power efficient than one of the more popular US models, Meta’s Llama 3.1. This breakthrough creates both opportunities as well as obstacles.

On the one hand, DeepSeek might help ease one of the obstacles to broad AI adoption: constraints on power generation. More power-efficient AI will be less costly to use, and we expect this will help speed up AI adoption and its productivity gains throughout the global economy.

On the other hand, this also exposes the risk of owning data centers, as it calls into question the energy demands of AI in the future. In December 2024, the Department of Energy projected that US data center electricity demand could increase by 16% to 26% by 2028. The efficiency of DeepSeek makes it unlikely that demand will reach the bull case and calls into question if even the bear case will be reached.

Further, data centers require more capital investment than most other CRE sectors, especially for hyperscale and colocation facilities, which are the most common implementation.

The elevated CapEx is indicative of technological obsolescence risk, as it is often the case that the additional capital is necessary to keep up with technological change. In only seven years, Google has reportedly revamped its cooling systems multiple times—shifting from air to liquid—to keep pace with the demands of next-gen chips. It’s a clear signal: data center infrastructure is evolving fast.

3) Data centers are illiquid.

Conceptually, real estate liquidity is based on (1) how often the asset trades, (2) the size of the investor base, and (3) the ease of valuation. With this framework, data centers are less liquid than all traditional CRE sectors. Despite data centers being the most illiquid, they no longer offer a valuation discount to the broader CRE market.

INVESTING ALONGSIDE THE DIGITAL INFRASTRUCTURE BUILDOUT

Despite informed skepticism on data centers, we are AI believers and expect the CRE landscape to change as AI adoption increases. However, we prefer to invest in CRE that stands to benefit beyond data centers.

The CHIPS Act and the Inflation Reduction Act are fiscal stimulus measures aimed at further incentivizing the buildout of critical tech infrastructure.

As of year-end 2024, these fiscal measures were the catalyst for more than $1 trillion in private sector capital investment across semiconductor, renewables, and biomanufacturing.[iv]

Interestingly, through year-end 2024, nearly half of those private investments have been made in just three states: Texas, New York, and Arizona.

We believe the Trump administration is unlikely to roll back these incentives. These programs are helping red and blue states alike, and they support the reshoring and growth of US manufacturing.

Additionally, the recently floated Stargate fiscal stimulus initiative (while lacking details) seems to have a similar objective as the CHIPS and Inflation Reduction Acts, indicating broad support of this type of program from the current administration.

Fiscal stimulus via CapEx is the most effective form of stimulus, with academic literature suggesting fiscal multipliers can be as high as approximately six times.[v] Stimulus creates jobs, knock-on business formation, and retail spending in areas where the CapEx is spent.

By following this money and focusing on the demand created by the changing trends in real estate, knowledgeable investors can capitalize on this growth. 

As an example, in Phoenix we developed a 200,000-square-foot industrial asset in the Price Road Corridor, a location proximate to Intel’s $50 billion Ocotillo campus. Because Intel is one of the largest beneficiaries of funding from the CHIPS Act, the investment thesis was to draft off the additional demand created by the capital infusion into the area.

While still under construction, the building was entirely pre-leased to one of Intel’s vendors at a rent above underwriting. Despite being a new building, designed and constructed to the latest spec, the tenant came out-of-pocket to upgrade the power to 10,000 amps. This is roughly three to five times what was previously considered the standard for a building of this size and was due to the elevated power requirements of the tenant’s advanced manufacturing techniques. It’s a clear indication that the definition of “modern industrial” is shifting—driven not just by square footage or clear heights, but also by power capacity, manufacturing capabilities and proximity to innovation hubs.

For investors, the takeaway is simple: The next generation of industrial demand will increasingly be shaped by technological innovation, and the assets that can keep up will be the ones that outperform.

SUMMIT #18

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Note from the Publisher

Gunnar Branson | AFIRE

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Powering Future Development: The Power and Players Behind Economic and Real Estate Development

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US Solar in 2025: What Matters in the United States for Solar Investors

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Decentralized Energy: Energy Systems, Decentralization, and the Built Environment

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Let’s Be Honest – It’s About NOI

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Targeted Investment: Untangling the Building and the Grid

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Faring On Adoption: How Does US Commercial Real Estate Fare on Green Energy Adoption?

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Powering the Future: Energy, Trade, and Climate Risks in Global Real Estate

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Root Causes: An Honest Addressing of the Climate Crisis

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Grid-Interactive Multifamily: Beyond Efficiency: Multifamily Buildings as Energy Assets

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Power as a Platform: The Role of Real Estate in the Grid of the Future

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Unlocking Abundance Together: How Real Estate and Energy Stakeholders Can Power Growth and Investment

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Investing in Tech Adjacencies: Leveraging the National Tech Buildout Beyond Data Centers

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Navigating the Labyrinth: The US Regulatory Landscape at the Intersection of Nuclear Energy and Data Centers

Amy Roma + Chip Cannon + Porter Wiseman | Hogan Lovells

Transmission Alley: Rural Real Estate, Railways, Renewables, and the Future of Data Infrastructure

Michael Maloff + Gary Goodman | Dentons