Data Center Appraisal | LOGAN Valuation

Definition

Data Center Appraisal – Appraisals of facilities or buildings that store internet servers or other data-based equipment. Demand for such facilities is growing exponentially in Latin America with the need for more data storage from online services such as banking, social media, AI, 5G and others. Usually, these buildings are located within industrial parks, but have customized design and often redundant or backup components:

Security, Fire Protection – high levels of security are necessary to ensure that the data stored within the center is safe. This includes typical CCTV and security patrols, fences, security guards, as well as strict entry requirements. For fire protection there are often sprinklers, mists, and no water systems (chemical suppression).

Cooling – servers generate heat and need to be cooled with robust systems that cool them. These usually also have backup systems that can be initiated if there is a failure in the primary system. Airflow within the data center is of principle concern as well.

Power Sources – there are heavy requirements for electricity consumption, as the servers do generate major demand. These power systems must have backup systems that initiate automatically if there is a power outage. These include battery banks and diesel or gas turbine generators. Often, there are also two sources of primary power, or connections to the power grid.

Internal Equipment – data centers consist mainly of servers that can be easily expanded or moved as demand from users changes over time. This equipment is not considered in the appraisal of the data center, as it is not fixed to the asset itself.

Raised Floor – a raised floor is an important component that allows for cables to be fed through the floor of data centers.

Site Selection – factors include telecom infrastructure, power grid capacity and proximity, emergency service proximity (Police), neighborhood uses, and climate (effects the cost to cool such data centers). Data center growth has been observed in Bogota, Mexico City, Querétaro, Medellin, Lima, and San Jose.

There are a few notable standards for the design of data centers of note:

– International Standards EN50600 and ISO22237 of Information Technology

– Telecommunications Industry Association – TIA-942

– Uptime Institute – Data Center Tier Classification Standard

Types

Modular Data Center – this type of data center can be expanded or reduced depending on client demand. Often these are pre-engineered and may be comprised of containers or shipping containers that can be easily transported.

Green Data Center – data centers that focus on reduced emissions. Often these centers us outside air for cooling – and are in arctic locations. There is also a renewable energy focus of such centers.

Data Center REITS – although not a type of data center, REITS comprised of data centers are now a growing type of investment. These investment funds are growing quickly and will benefit from increased future demand (5g and AI). These REITS are mostly located in the US and Europe. In Latin America, some real estate funds have invested in data centers as part of their broad stabilized asset portfolios including funds managed by PEI, Visum, FUNO, among others.

Approaches, Relevance

Cost – most data centers are relatively new, and this approach can be applicable. Since the type of asset is custom, special attention may need to be placed on the developer profit associated with the cost approach. It may be higher than other projects, due to the special use and higher perceived risk of the asset class.

Sales Comp or Market Approach – there are few transactions in Latin America of data centers – only build to suit transactions that have taken place. A comparable sale can be extracted from such transactions.

Income Capitalization – income is a useful method when evaluating data centers as it is a method investor would use to purchase such assets. Sometimes, however, contracts have a fixed portion and a % of the sales of data center space to tenants. Without an operating history, these contracts are difficult to analyze and project.

DCF – this method is useful to determine the future net cash flows of the property. Since data centers are a relatively new asset type, the future is less certain than other property types such as office or retail. Demand will likely grow in the short and medium term; however, will technology advances reduce the footprint of servers? Will another unknown technology affect the asset class? On a positive note, centers can be easily converted to other industrial uses in the future.

Value Impacting Factors

Contracts – there are companies that are dedicated to providing capacity for users. These companies sign long-term contracts for data center space. Sometimes, these contracts have a variable component related to the amount of space or capacity that can be sublet to users.

Location – the cost of energy and climate are important factors when determining the efficiency of operations of a data center. Further, proximity to users is also a very important.