Real Estate Newsletter 5.1.24
Weekly News Roundup
- AI Causing Data Center Construction Bottleneck
- Downtown Detroit Real Estate Recovery
- San Francisco Real Estate Worsens
Investment Announcement
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AI Causing Data Center Construction Bottleneck
The frenzy to build data centers to serve the exploding demand for artificial intelligence is causing a shortage of the parts, property and power that the sprawling warehouses of supercomputers require. The lead time to get custom cooling systems is five times longer than a few years ago, data center executives say. Delivery times for backup generators have gone from as little as a month to as long as two years. A dearth of inexpensive real estate with easy access to sufficient power and data connectivity has builders scouring the globe and getting creative. New data centers are planned next to a volcano in El Salvador and inside shipping containers parked in West Texas and Africa.
Creating and deploying complex AI systems requires unprecedented numbers of chips. Analysts estimate that training the version of ChatGPT that came out in 2022 required more than 10,000 of Nvidia’s GPUs, while more recent updates have required significantly more—putting further strain on data centers. Large tech companies have struggled to get their hands on supplies. The amount of data-center space in the U.S. grew 26% last year, according to real-estate firm CBRE, and a record amount was under construction. The price of available space is rising while vacancy rates are negligible—a sign that supply isn’t keeping up with demand.
Cloud giants like Amazon Web Services, Microsoft and Alphabet’s Google are investing billions of dollars in new data centers. Google’s capital expenditures—almost half of which was on its data infrastructure—jumped 45% from a year earlier to $11 billion in the three months through December. The rush to build has ratcheted up the time needed to acquire some critical data-center components. Transceivers, which connect different networks of servers, now take months longer to arrive than before. Labor costs have also become an issue as data-center builders have faced a shortage of construction workers trained on these types of sensitive installations. Getting smaller networking components, like cables that connect different racks of servers, can take months. Source: Wall Street Journal
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Downtown Detroit Real Estate Recovery
Barely a decade after Detroit declared bankruptcy, the city is emerging as America’s most unlikely real-estate boomtown. A development frenzy has gripped Detroit’s central business district. Big companies, including Ford and developer Related Cos., are spending billions of dollars on office buildings and other properties. Dan Gilbert, a Detroit native and the billionaire co-founder of home lender Rocket Mortgage, is leading the city’s revitalization. His new skyscraper, still under construction, recently topped out at 681 feet, making it the city’s second-tallest tower. It sits across the street from downtown Detroit’s first Gucci store.
The city’s residential market is also taking off. Home prices in the area are up 40% since 2020, and last fall had the steepest rise among major U.S. metropolitan areas. The number of apartments downtown has more than doubled to 5,903 since 2010, according to the Downtown Detroit Partnership. Detroit’s business-district transformation offers lessons to other cities that are struggling to revive their empty downtowns and avoid being sucked into a debilitating doom loop. Cities across the country are racing to convert commercial buildings into apartments. They are also adding bars, restaurants and entertainment venues to make up for the missing foot traffic.
The bankruptcy and headlines of Detroit’s decay also created more urgency in the city and state to shower developers with tax breaks. These are often controversial but are important because rents in Detroit are too low for projects to pay off otherwise. The Michigan Central project, for example, is set to receive more than $200 million in tax incentives. Downtown still has challenges. Foot traffic is down from 2019, largely because of remote work. Still, there is little doubt that downtown Detroit is turning around. Source: The Wall Street Journal
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San Francisco Real Estate Worsens
San Francisco’s housing market, in particular, has been hit hard over the past year, with prices plummeting and homeowners fleeing in droves. Once-luxurious properties are now listing and selling for massive discounts just to attract buyers. Consider the penthouse at the San Francisco Four Seasons Residential, initially listed in November 2020 for $9.9 million, now begging for buyers at $3.75 million — a jaw-dropping 62% markdown. It remains on the market today. Homeowners desperate to escape the sinking ship are offloading their properties at losses, with many seeing their investments dwindle by hundreds of thousands of dollars in just months. A five-bedroom home at 478-480 Fourth Ave. sold for $1.1 million earlier this month, after selling less than a year prior for $1.6 million.
At 88 King St., a two-bedroom condo overlooking a ball park that sold for $1.12 million more than a decade ago in 2014, recently sold last month for $1.08 million. Another two-bedroom condo at 1075 Market St., which sold in 2019 for $1.25 million just traded hands earlier this month for $675,000 — and after a price cut, to boot. The broader trend, according to the latest Redfin analysis, is stark. Nearly one in five homeowners in San Francisco are selling their homes for a loss.
The commercial sector isn’t faring any better, with office vacancies soaring post-pandemic. And the desperation is palpable, as evidenced by the recent sale of a property on Market Street at a mind-boggling 90% discount. The building at 995 Market St. was acquired for just $6.5 million during a public auction last week. The previous owner had paid $62 million for it in 2018. Even retail giants are abandoning ship. In February, Macy’s announced that it was closing its massive flagship store in San Francisco’s Union Square. The year prior, Nordstrom had announced it was closing two of its stores over the “deteriorating situation in the area.” Source: The Wall Street Journal
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