RealEstateNews 10.7.24

Weekly News Roundup

• Data Center Construction Boom
• New Uses for Empty Offices
• China’s Unfixable Housing Bust

Data Center Construction Boom

As artificial intelligence and cloud storage hoover up more and more space on the nation’s computer servers, real estate developers are racing to build new data centers or convert existing buildings to data uses. The need is so great, they’re having a hard time keeping up with demand as businesses in search of secure spots for their servers rent nearly every square foot that becomes available. Large-scale backup generators to keep the 24/7 operations running in the event of a power failure are in short supply. Construction of new data centers is at “extraordinary levels” driven by “insatiable demand,” a recent report on the industry by real estate brokerage JLL found.

The biggest drivers are AI and cloud service providers that include some of the biggest names in tech, such as Amazon, Microsoft, Google and Oracle. With occupancy in conventional office buildings still down sharply from the effect of the COVID-19 pandemic and property values falling, data centers represent a rare ripe opportunity for real estate developers, who are pursuing opportunities in major markets such as Los Angeles and less urban locales that are served by plentiful and preferably cheap power needed to run data centers. Power demand for computing is growing so intense that it threatens to strain the nation’s electrical grid, sending users to remote locations where power is plentiful and preferably cheap. 

Data center developers are working in Alabama, the Dakotas and Indiana. Construction is taking place at an “extraordinary” pace nationwide and still not keeping up, the JLL data center report said. “Vacancy declined to a record low of 3% at midyear due to insatiable demand and despite rampant construction.” Development increased more than sevenfold in two years, with the pipeline of new projects leveling off in the first half of 2024, a potential signal that the U.S. power grid cannot support development at a faster pace. Data centers have long been big power users. But the specialized computer chips required for generative AI use far more electricity because they are designed to read through vast amounts of data. Source: Yahoo Finance

New Uses for Empty Offices

Well over 60 New York City office buildings are currently in the process of attempting to quickly convert into homes, with some more viable for such remodeling than others. Transforming empty or under-used office spaces has become an increasingly popular tactic as employees continue to significantly do their jobs remotely and the affordable housing crisis creates high demand for residential.  

However, by some estimates, only 3% of New York City office buildings and 2% in downtown Denver are suited for residential conversions for example. However, office space and homes are two fundamentally different types of buildings, according to builders and architects. Problems include a lack of natural light, the need for individual controls for heating, and ceiling heights that make electrical and HVAC retrofits impossible.

Residential conversions are a heavy lift for many of the city’s empty commercial towers because of zoning restrictions, costly logistical issues, or both. A new possibility for New York’s vast, semi-windowless office caverns: conversion to film and TV production studios. A growing number of TV shows and movies are filmed on virtual sets, which are high-tech soundstages with built-in LED screens that allow directors to film actors in front of computer-generated sets in real time.

Mid-century office properties with deep floor plates could be good candidates for conversion to virtual production facilities if they can be retrofitted with higher ceilings, more electrical voltage, additional ventilation, and acoustic insulation. Despite the amount of work it would take it would still be cheaper than converting an office building to apartments or demolishing a building outright and constructing something new. 

Data centers are also being built in suburbs and exurbs of major metropolitan areas where land is more expensive. These newer data centers are also popping up in markets where massive one-story windowless data centers behind a barbed wire fence won’t fit in with the rest of the area. That’s why the future data center is increasingly taking the form of multistory buildings resembling office towers.

Building upward offers other advantages to data center operators. Chief among them is maximizing return on investment by renting more space to data-hungry AI operations. Additional expenses come with building higher, such as extra plumbing and electrical work, but the multistory data center is here to stay. This is where there could be a window of opportunity for some of America’s troubled commercial real estate. Some multistory office towers in suburban markets that are also struggling for tenants could theoretically be converted into data centers.

China’s Unfixable Housing Bust 

China’s real-estate bust left behind tens of millions of empty housing units. Now that historic glut of unoccupied property is colliding with China’s shrinking population, leaving cities stuck with homes they might never be able to fill. The country could have as many as 90 million empty housing units, according to a tally of economists’ estimates. Assuming three people per household, that’s enough for the entire population of Brazil. Filling those homes would be hard enough even if China’s population were growing, but it’s not. Because of the country’s one-child policy, it is expected to fall by 204 million people over the next 30 years. “Fundamentally, there are not enough people to fill the homes,” said Tianlei Huang, a research fellow at the Peterson Institute for International Economics.

Some unused real estate will be bought up and lived in, especially if more government support—which economists have been calling for—convinces Chinese buyers that values will rise again. Big cities like Beijing, Shanghai and Shenzhen will almost certainly absorb their excess housing, given their dynamic economies and migrant inflows, which have helped keep their populations growing. The problem is much harder to solve in smaller cities, which often have weaker economic prospects and declining populations. In China, researchers informally group cities into tiers, and many of the nearly 340 cities classified as third-, fourth- and fifth-tier—with populations from few hundred thousand to several million people—are struggling economically. 

Young residents are leaving. At least 60% of China’s third-, fourth- and fifth-tier cities saw their populations shrink from 2020 to 2023, according to Wall Street Journal calculations based on official data. Those cities have more than 60% of China’s housing inventory, according to Harvard economics professor Kenneth Rogoff. Many encouraged developers to build more—even when their populations were falling—because land sales and construction boosted economic growth and fattened local governments’ wallets. “I don’t think the housing oversupply problem has a solution, really,” said Huang, of the Peterson Institute. “Fundamentally, it’s the problem of declining demographics. Ghost cities will remain ghostly.” Source: Wall Street Journal