Buoyed by robust demand for large parcels of undeveloped land, the rise of artificial intelligence workloads, and the game-changing role that hyperscalers are playing, the real estate market for data centers is in a strong position.
Real Estate Considerations
Acquisitions
Data center acquisitions have features that distinguish it from traditional real estate acquisitions, namely, the size of the parcel, zoning considerations, title and survey matters, utilities, and environmental studies. Many zoning codes do not specifically address data centers, so verifying, or updating, the zoning prior to development is critical. Another aspect unique to data center transactions is the need for significant infrastructure development and public utilities, which is why it is critical to engage with local community stakeholders early in the process.
Lastly, to ensure that both parties are on the same page, the buyer and seller should clarify their roles in the zoning process and infrastructure work. For a more detailed analysis on acquisitions, see our blog post Key Considerations in the Acquisition of Undeveloped Data Center Land.
Leasing
Single-tenanted data centers are most similar to long-term ground leases, which require tenants to have most of the property obligations and most of the liability. This works well in these transactions since tenants typically want the responsibility for their own maintenance and other property responsibilities due to privacy concerns. This is why one of the most significant issues in leasing negotiations is privacy concerns, including regarding landlord and third-party access to the data center and the concern of the building being sold to potential competitors.
In addition, the need for continuity of operations will lead to a tenant desire to have strong self-help provisions. Further, tenants in these leases may require extended cure periods and a memorandum of lease to protect their investment.
Utilities in Data Center Projects
With respect to utilities, it is important to have double or triple redundancy with data centers. For example, there might be more than one power source or fiber lines entering the facilities, with backup generators or water towers to ensure that the data center is still operable in the event of service interruptions.
Environmental Considerations
When dealing with real estate—especially commercial, industrial, or development properties—the environmental conditions of a site are critical as to both future liability for potential contaminants on-site, as well as conditions which dictate permitting requirements. Accordingly, it is critical during the due diligence period to understand the conditions on-site.
With regard to liability for contamination, Phase 1 and Phase 2 Environmental Site Assessments (ESAs) are tools that come into play. Phase 1 ESAs are non-intrusive reviews conducted by an environmental professional designed to identify and assess the potential for contamination to be present. The Phase 1 process involves record reviews, a site visit, interviews with those knowledgeable about the conditions of and activities that occur on-site and other actions.
If it is determined that contaminants are present, then a Phase 2 is completed to assess whether a contaminate is actually present and if so the extent of that presence and involves collection and analysis of samples (i.e., groundwater, soil, air, building materials, etc.) the extent of the contamination present and identify potential ways of addressing. Phase 1 and if needed, Phase 2 ESAs are critical to assigning liability for past contamination under certain regulatory regimes such as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). They are also essential in assessing and addressing the risks of stepping into the title of a piece of property and developing same.
Permitting
Once the existing conditions on the site are identified, additional studies may need to be conducted for permitting purposes, such as
- wetlands jurisdiction;
- special status species; and
- archeological/historic resources.
Air quality impacts associated with the development of large data centers are also a major consideration given the high level of emissions associated with operations. It is essential to determining the baseline air quality conditions, as this defines the kinds and amount of constituents which can be released as part of construction and operation and identify and quantify necessary mitigation.
In most states, or if there's a federal agency, there will have to be an environmental review conducted as part of the entitlement process. This process involves the identification of potential impacts on specific resources, consideration of alternatives and identification of mitigation for unavoidable impacts. The environmental review is usually also subject to public participation.
As data centers continue to anchor digital infrastructure, success hinges on aligning real estate strategy with environmental responsibility from the outset. By proactively integrating leasing or acquisition decisions with permitting and environmental considerations, it can increase the chances of successful development and create long-term, sustainable value.