2 Data Center REITs Riding The Digital Tech Wave

According to the Bureau of Economic Analysis (BEA), the digital economy has grown to $2.6 trillion market and now represents 10% of the entire U.S. gross domestic product (GDP). This growth was fueled by the integration of advanced technologies such as e-commerce, cloud computing, data analytics, and blockchain platforms. A critical component of this shift is fifth-generation (5G) technology which brings a new era of smartphone functionality and other digital services.   

Data centers, the powerhouses of the digital economy, store and manage the vast amounts of data and applications that these technologies generate. These facilities are equipped with servers, storage systems, routers, switches, and firewalls that ensure the efficient and secure operation of enterprise IT systems. 

However, the data center sector has faced challenges, including weakened demand for computing and telecom equipment due to tough macroeconomic conditions and supply chain disruptions throughout 2022 and 2023. High interest rates and concerns related to oversupply have also negatively impacted data center companies.   

However, the rise of artificial intelligence (AI) has reinvigorated demand for data storage. AI’s rapid advancements require robust digital infrastructure capable of handling significant storage needs. Alongside AI, smart grids and 5G devices are poised to further boost demand for data centers.   

Global investments in data centers are expected to exceed $400 billion by 2025. For investors looking to capitalize on this trend, there are limited options. Currently, only two publicly traded companies are considered ‘pure plays’ in data center properties: 

Equinix (EQIX)  

Equinix is a real estate investment trust (REIT) that specializes in interconnected data centers and serves a diverse clientele that includes cloud software, IT, financial services, and mobile telecom businesses.   

Equinix manages around 260 data centers across 75 metropolitan areas worldwide, many of which utilize renewable energy sources such as wind farms. This positions Equinix as an environmentally friendly investment option.   

As the larger of the two pure-play data center REITs by market cap, Equinix aims to balance a slower growth profile in North America by expanding its presence in the faster growing regions of EMEA and APAC. The company is also venturing into new markets in South America and Africa, with plans to construct nearly 50 new data centers in 21 countries.   

An additional appealing aspect of investing in Equinix is the stability provided by its lease agreements. Approximately 60% of its customer leases are long-term and expires after 2038.   

Last, Equinix increased its dividend by 25% in October 2023, offering a current yield of 2.2%.  

Digital Realty Trust (DLR) 

Digital Realty Trust is also a real estate investment trust (REIT) that specializes in cloud and carrier-neutral data centers. Catering to enterprises in cloud software, financial services, mobile services, and social media, Digital Realty operates more than 300 properties in 25 countries.   

Digital Realty’s growth strategy is multifaceted, including accretive mergers and acquisitions, joint ventures, and in-house development projects. Additionally, Digital Realty deserves credit for divesting older properties in the U.S. to prepare for growth projects.   

In 2023, Digital Realty’s revenue increased by 17%, surpassing Equinix’s growth of 13%. This performance highlights Digital Realty’s expansion capabilities, particularly its successful international joint ventures in Asia and Europe.   

Although Digital Realty has not raised its dividend in the past two years, it currently offers a dividend yield of 3.4%, which is higher than that of Equinix, making it an attractive option for investors seeking higher income returns.