Blackstone is not alone in its ambitions to rapidly expand its data center holdings. Firms like KKR, Digital Realty, and Brookfield are also eyeing the asset class which has received a staggering $43 billion worth of investments in America alone between 2021 and 2023, five times the previous three years. Emerging Real Estate Digest has previously written a three-part data center series: (1) Introduction to Data Centers, (2) Drivers of the Investment Thesis, and (3) Cautionary Note (i.e., Bear Case).
Blackstone's foray into data center investing began in 2010 with a strategic investment through its $3.6 billion Blackstone Tactical Opportunity Fund, in Telx, a leading data center provider then valued at $3.6 billion. The real turning point came in 2021 with the $10 billion acquisition of QTS Realty Trust, a major data center operator with campuses nationwide in America. The deal was the largest in data center history at the time, catapulting Blackstone into the top tier of industry players.
“We are focused on investing in assets that are benefitting from strong, secular tailwinds, such as the rapid digitalization of data. QTS is a leading provider of data center solutions with a portfolio of high-quality assets in desirable markets, positioning it well to capitalize on these powerful trends in the data center space. We believe the vast expertise across our business will enable the QTS platform to succeed over the long-term,” - Tyler Henritze, Head of Acquisitions Americas for Blackstone Real Estate.
“We are delighted to back QTS and its world-class management team as they continue to scale the company to meet the rising demand for data centers. QTS aligns with one of Blackstone’s highest conviction themes – data proliferation – and the required investment makes it well suited as a long-term holding for our perpetual capital vehicles. We are committed to a strong, lasting partnership, leveraging Blackstone’s scale, reach, resources and access to capital to drive long-term growth at QTS." - Greg Blank, Senior Managing Director, Blackstone Infrastructure Partners.
QTS has been a very good investment for Blackstone. It has $15 billion of properties under development, up from $1 billion leading up to the acquisition. The private equity manager has jumped from fourth in data center capacity, as measured by megawatts under contract, to number one in North America in just three years. In 2023, Blackstone partnered with Digital Realty Trust to develop $7 billion worth of data center properties across Europe, marking the firm's first investment in data centers outside of North America.
Competitors are also investing. Brookfield acquired data center company, VERITAS, for $8.2 billion in 2021. KKR invested $4.7 billion alongside Cyrus Capital Partners in CyrusOne, a major data center operator. Equinix has continued to expand its portfolio of 250 data centers, in 45 countries, through organic growth and acquisitions. American Tower Corporation, a REIT with a market cap of $84 billion in January 2024, entered the data center space by acquiring Colo in 2019, an Atlanta data center company. In total, private equity firms have concluded $43 billion worth of data center deals in America between 2021 and 2023, five times the previous three years.
A point of contention hindering data center expansion is that they soak up water and power. As generative AI crunches data and spits out inputs, the server racks and semiconductors performing the tasks are pushed to the max. AI computing consumes four times the power of similar cloud processes, and advanced water cooling systems are required to handle the heat emitted. A large data center will require 1 gigawatt of power, the equivalent of 100 million LEDs. Power and water constraints make building more capacity difficult, but also has helped push up rents in core markets leading many campuses to double in value in a short period.
There are other headwinds which you can read about here. Despite the risks to the investment thesis, firms like Blackstone show that the investing theme is alive and well and showing no signs of abating.