Big Tech’s Correction Spells Trouble For Data Center REITs

Good morning. Data center developers are headed for trouble now that Big Tech clients are cutting costs and leaving leases. Regulators scrutinize BREIT and Starwood’s REIT as both funds limit withdrawal redemptions while telling investors to keep calm. Meanwhile, spooked office owners pressure the government to save the industry by sending employees back into offices.

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BIG DATA

Big Tech’s Correction Spells Trouble For Data Center REITs

Northern Virginia has now surpassed Silicon Valley to become our national data center hub, consuming enough electricity daily to power 1.5M homes. But now that a market correction has curbed Big Tech’s appetite, data center owners may have too much on their plate.

Come to MAMAA: The main customers for data centers are the MAMAA hyperscalers—Alphabet (GOOG), Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT)—that handle so much data they need to outsource some of it to third-party centers. The solution so far has been REITs, which bought up data centers and leased them out to Big Tech in order to get a cut of the profits. According to Synergy Research Group, $48B worth of data center deals closed in 2021 alone.

Mother knows worst: Thing is, these investments might not pay off. Data center REITs provide little return on investment but need tons of equity and fresh debt to keep up with the costs of expanding. And unlike other REITs, data center REITs expanded really fast because they’re tied to Big Tech. That was fine in 2021, when the industry seemed invincible. But now that rents are dropping and big tech companies are in the red, the future of third-party data centers is up in the air.

➥ THE TAKEAWAY

Bad parenting: The tech giants will survive, but data center REIT investors may not be feeling too hot right now. Since Big Tech only ever rented out third-party data centers, they can back out without a scratch. Meanwhile, the REITs that actually own those data centers are left with huge upfront losses on data centers that never earn back what it cost to build them.

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IN THE SPOTLIGHT

Blackstone, Starwood REITs Draw SEC’s Attention After Limiting Withdrawals

Robin Hood, sort of: Previously, the smallest stake an investor could buy in BREIT was $1M. But now, investors coming through Fidelity Investments can stake as little as $2,500. Wealthy investors have long clamored for lower limits so the fund can bring in more cash. Still, the new program doesn’t exactly inspire confidence, given Blackstone’s liquidity problems mean they fulfilled less than half of investors’ redemption requests this quarter.

It’s not me, it’s you: Blackstone CEO Steve Schwarzman insisted that investor withdrawal requests reflect their need for liquidity, and have nothing to do with the financial health of BREIT. He even said that the fund’s lack of cash means nothing because its business “is built on performance, not fund flows, and performance is rock solid.” Well, as it turns out, it is and it isn’t. While Blackstone’s flagship funds have outperformed REIT markets in 2022, shares have also dipped 42%.

➥ THE TAKEAWAY

Not what it looks like: Image matters. Blackstone says they plan to honor every investor redemption request they receive this quarter. If they do, they’ll probably be alright. Either way, investor confidence has been shaken because Blackstone is holding their money hostage. Of course, the global asset manager and its financial advisors want everyone to stay calm. But if investors don’t listen, BREIT may be in hot water.

BACK TO THE OFFICE

Office Owners Urge Government to Bring Back Workers

As everyone scales back on office space with the rise of remote and flexible work, prominent office landowners are pressuring the federal government to force employees to come back into work. They’re also asking the government to help them convert unused office space into residential units, which would help them cut their losses.

Get back to work! The Real Estate Roundtable, an organization dedicated to the interests of prominent property owners, sent the Biden administration a letter asking them to reinstate in-person work. On average, office space occupancy in major U.S. cities is less than half of what it was before March 2020. And since the government either owns or leases over 250 MSF of office space nationwide, it makes sense that the Roundtable wants them to help.

Home from work: The Roundtable also wants Uncle Sam to pass legislation supporting the conversion of unused office space into residential units, a trend that’s recently become popular (and very necessary) in crowded cities like Chicago, New York, and D.C. The request involves changing zoning laws and/or the institution of subsidies that would allow more conversions to happen faster.

➥ THE TAKEAWAY

Which is it? Since 16 of 24 major federal agencies have stated they intend to cut back on office leases and another 19 plan to reduce square footage, the Roundtable’s request looks like a pretty tall order.But the second ask seems more reasonable because conversions are already popular and the Biden administration wants to fix the affordable housing crisis. It’s easier to help suppliers meet demand than to artificially create demand for suppliers.

📰 Editors' Picks

• Keep it together: Homebuilding giant Lennar has decided to postpone spinning off its multifamily business until market conditions improve.

• The REIT stuff: Institutional investors will increasingly include REITs in their portfolio next year in order to diversify their holdings.

• Spilling the Tax Tea: Billionaire Ken Griffin sues the IRS over its release of his tax records to ProPublica. No comment.

• Curtains for Cineworld: The second-largest movie theater operator in the world is trying to get out of 23 more leases as part of its ongoing bankruptcy process.

• Data done better: To cut costs, Meta plans to redesign its data center technology and optimize workflows for more AI automation and control.

• No place like prison: Chinese property tycoon Zhang Li narrowly avoided going to jail in London by locking himself in his own luxury tower.

• Frisco’s f*cked: Job cuts, remote work, and Big Tech’s correction have left one of the country’s emerging tech hubs in rough shape.

• LA noir: In one LA’s biggest corruption cases in years, a Beverly Hills developer was sentenced to four years in prison for bribing a county official.

🤝 Deals & Dealmakers

• Verizon’s big call: The comms titan just shelled out $130M for a data center in downtown LA.

• Ready to roll: After raising $600M, Greystar closes its third CRE debt fund and will begin acquiring debt.

• Yes way, Norway: Norway’s €1.2T sovereign fund will devote more of its holdings than ever to global real estate.

• Mi casa es Casa Tua: The luxury restaurant Casa Tua will partner with Fortune International Group to build a mixed-use development with a condo tower in Miami.

• What happens in Vegas stays in Delaware: The Las Vegas Raiders’ corporate HQ and training facility have been acquired by Capital Square on behalf of a Delaware-based trust.

• Highwoods goes higher: In a 50/50 joint venture, the Highwoods JV and Granite Properties paid $395M to acquire a 557 KSF mixed-use property in Dallas.

• Shopping for shopping centers: A Raleigh shopping center sells for $12M (almost double its assessed value) as traditional shopping centers are still in short supply.

• That’s a wrap: Bisnow covers the 16 biggest real estate deals and trends that defined 2022.

📈 Chart of the Day

😎 Offering-MEME-Orandum

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.