U.S. data center restrictions boost REIT outlook

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Data center REIT outlook

Highlights

U.S. moratoriums, audits, and local opposition are slowing new hyperscale data center projects, increasing the value of existing operators' facilities.
Data center REITs have returned 36% year-to-date, with Equinix upgraded to Buy on July 30 after outperforming following Texas' project freeze.
The FTSE Nareit All Equity REITs Index is up 15.7% in 2024 versus the S&P 500's 12.6%, but higher inflation or Fed tightening could renew sector pressure.

Moratoriums tighten supply for existing operators

As reported by Weiss Ratings, a widening wave of moratoriums, audits and local opposition is slowing new hyperscale data center development and making operating facilities more valuable. The report points to New York's statewide pause on new hyperscale projects of 50 megawatts or more, Seattle's city moratorium after more than 96,000 emails from residents, and Texas' freeze on approvals for new data centers in its grid queue while regulators review applications.

Weiss says the shift is especially significant because Texas has been one of the most data-center-friendly power markets in the country. Its grid queue held 474 gigawatts of connection requests across about 1,800 projects, around 5.2 times the state's peak demand record set six weeks earlier, with roughly 90% tied to data centers.

The pressure is not limited to the U.S. The Netherlands has restricted hyperscale facilities to two designated national sites after Meta abandoned a proposed campus in Zeewolde, campaigners in Ireland are challenging the electricity impact of the sector, and courts in Chile have forced Google to revise plans over water usage concerns.

REIT performance gains support from scarce capacity

Against that backdrop, data center REITs have returned 36% this year, according to the text, making them one of the stronger subsectors in the listed property market. Weiss says Equinix and Digital Realty Trust, the two pure-play data center REITs in the group, benefit because inference centers need to remain close to major cities for latency and security reasons, and those metro locations are already difficult to replicate.

Weiss upgraded Equinix to Buy on July 30, citing stronger earnings, operating cash flow and net income. The text also says data center REITs rose 1.32% on the day of the Texas freeze, versus a 0.06% gain for the broader REIT index, and added another 1.62% the next day while the broad index fell 0.3%.

More broadly, the report argues REITs are recovering despite a higher-rate environment. The FTSE Nareit All Equity REITs Index is up 15.7% this year through Thursday's close, ahead of the S&P 500's 12.6%, while health care REITs are also benefiting from limited new senior housing supply and aging demographics. Weiss cautions, however, that a renewed inflation surge or further Federal Reserve tightening could revive the pressure that hit the sector in 2022.

In our earlier article on analyst rating changes tied to AI infrastructure, we noted that many Wall Street calls were increasingly shaped by surging data center buildouts and the resulting jump in U.S. electricity demand. We also highlighted how expectations around Nvidia-linked spending and physical infrastructure constraints were feeding into earnings outlooks and valuation targets across hardware, power, and related AI supply-chain names.

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