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Data-Center REITs On a Roll as Demand From Cloud Users Rises

Moumita Chattopadhyay
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Data-center REITs are on a roll and over the past four quarters have led the REIT industry in terms of funds from operations (FFO) growth, per a recent report from REIT.com. In fact, their FFO has grown 35% from the year-ago tally and 8.1% in the second quarter.

Particularly, demand from hyper-scale cloud users is high and has resulted in more than 177 megawatts (MW) of net absorption in the first half of 2018 even amid substantial new supply, per a report from CBRE Group Inc. (CBRE). The first-half level marked nearly two-thirds of the 2017 net absorption volume and signals a robust leasing activity for this year too. For Northern Virginia, which is not only the largest data-center market in the United States but also in the world, cloud users accounted for 65% of the market’s net absorption.

Moreover, including single-asset, portfolio and entity-level transactions, data-center investment volume in the nation touched $7 billion in the first half of the year. This highlights the solid interest of investors in the data-center market and confidence in its growth prospects. In major markets like Northern Virginia and Silicon Valley, development pipelines have been witnessing rapid preleasing.

In fact, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, data-center REITs will likely continue experiencing a boom market. Also, the projected growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five-eight years.

These factors, along with an improved outlook for economic growth, are anticipated to substantially drive growth of data-center REITs, including Digital Realty DLR, Equinix, Inc. EQIX, CyrusOne Inc. CONE and CoreSite Realty Corporation COR.

Nevertheless, pricing trends have not been impressive this year. This is because there has been demand for lower prices from cloud users for their bulk wholesale colocation capacity deals.

Currently, Digital Realty, Equinix, CyrusOne and CoreSite Realty carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The price performance of the stocks over the past three months is given in the graph below.

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Equinix, Inc. (EQIX) : Free Stock Analysis Report
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