What is the typical internal rate of return (IRR) range for data centers?

The internal rate of return (IRR) for data centers typically falls within the range of 12-18%. This is due to several factors that influence the investment performance of data centers. They are capital-intensive investments that require significant upfront costs, such as land, construction, and technology infrastructure. However, the growing demand for data storage and processing capabilities due to trends like cloud computing, big data, and IoT (Internet of Things) creates strong revenue opportunities for these facilities.

Data centers generally benefit from stable cash flows given the long-term leases often associated with their tenants, which typically include tech companies and businesses reliant on data services. This stability can lead to attractive return profiles within the specified IRR range. Additionally, as data continues to proliferate in both personal and business contexts, the market trend suggests that the profitability of data centers is likely to remain robust, supporting an IRR on the higher end of this range.

While lower IRR ranges may apply to other real estate sectors that face higher volatility or different risk profiles, the combination of high demand, stable income streams, and the essential nature of data services for modern economies positions data centers favorably within this 12-18% IRR classification.