It’s hard to underestimate how ingrained data centers have become in everyday life and how vital they are to creating the digital infrastructure that supports the modern economy. Twenty years ago, however, few investors envisioned how valuable the burgeoning asset category would become. That includes Wall Street, which in October 2004 priced Digital Realty’s (NYSE: DLR) initial public offering (IPO) shares at $12, around $3 below expectations.
Two decades on, the first data center REIT to be listed continues to push boundaries, demonstrating its strong investment thesis and the integral role it plays in today’s digital transformation.
At the time of the IPO, Digital Realty President & CEO Andy Power was part of the company’s underwriting team at Citigroup. He’s quick to point out that his role was “building the model and fetching coffee” for the IPO, which was monetizing 5.6 million square feet across 22 data centers in the United States and one in London. Nevertheless, closing the deal was touch-and-go.
“We barely got the company public because nobody knew what a data center was—it was well before tech companies were household names,” adds Power, who along with other Digital Realty executives rang the opening bell at the New York Stock Exchange in November 2024 to mark the REIT’s 20th anniversary. “At the time, Digital Realty was just a collection of assets based on the investment thesis of an intersection of technology and real estate.”
Incremental Demand
It obviously turned out to be a thesis with merit. After raising $257 million at its IPO, the Austin, Texas-based REIT today has a market capitalization of more than $61 billion and serves over 5,000 customers. Its 41 million-square-foot portfolio spans more than 300 data centers in 25+ countries, and it currently has 9.1 million square feet of space under construction.
Digital Realty initially focused on Boston, San Francisco, Silicon Valley, Phoenix, and other markets that had high concentrations of tech tenants. Early customers included financial institutions that had moved their mission critical information technology (IT) infrastructure offsite to mitigate natural disaster and terror risks, telecommunications carriers cross-connecting and passing voice, data, and internet traffic, and web hosting companies.
Then mobile computing came along, followed by cloud computing and, most recently, artificial intelligence (AI). Digital Realty was among the earliest firms to build huge data centers to support so-called hyperscalers—Amazon, Google, and other giant cloud providers. But its customer base also includes smaller businesses that are executing digital transformations, from automating processes such as inventory management to leveraging consumer data for an e-commerce strategy.
“It’s like a layer cake of incremental demand that started years ago and keeps going,” Power says. “We’re still seeing a roll out of 5G networks and then there will be 6G. Cloud computing is still scaling and we’re just beginning to see the tip of the iceberg of AI.”
Given that demand, it should be no surprise that the REIT is positioned to profit from the secular growth story. Measured by power capacity, Digital Realty’s flagship data centers today can deliver 100 megawatts, which is enough to fuel about 80,000 homes, according to Energy Innovation, a non-partisan think tank. By comparison, when Power joined the company as CFO in 2015, its flagships had capacities of around 20 to 30 megawatts.
All told, Digital Realty’s current portfolio possesses 2.7 gigawatts of power capacity. But because some years ago the REIT anticipated the size and power capacities of data centers continuing to expand, it began acquiring development sites. As a result, its current land bank can support development of nearly 4 gigawatts of additional capacity, Power says. It has secured 500 acres near Dulles Airport in Virginia—enough land on which it can more than double its existing footprint.
“Nobody thought data centers were going to get this big, and that has allowed us to be ahead of the curve,” he says. “As cloud computing continues to grow and as AI is scaling up, we’re not out searching for dirt. We own it.”
Going Global
In addition to recognizing the expanding footprints and power capacities of data centers, Digital Realty early on took note of growing global demand for the assets. In large part, that’s because its U.S. customer base tended to do business internationally, and the REIT began serving those customers in other countries, Power says. But cloud computing and the rise of data sovereignty—the concept that data should be governed by local rules and regulations—perpetuated Digital Realty’s global expansion, he adds.
Its global strategy of late has led to its entrée into the Asia Pacific region. In early 2024, the REIT launched its first data center in India on a 10-acre campus capable of supporting up to 100-megawatts. That followed the opening of a 12-megawatt data center in Seoul in 2022.
“For close to 10 years, around the time I joined the company, the company was very Americas-heavy,” Power says. “But we saw the global nature of this industry even before the cloud globalized.”
At around 25 million square feet, Digital Realty’s U.S. footprint is still more than twice the size of its portfolio in Europe, the Middle East, and Africa (EMEA), its next largest region. While the company is open to additional global opportunities, including building upon its smaller presence in Asia and Latin America, the advent of AI has effectively rebirthed the original cycle of data center development. That is, U.S. multinationals are once again driving buildout activity on their home turf, Power says.
“Eighteen to 24 months ago, the U.S. was the most developed and largest data center market, but it was growing the slowest; Europe had higher growth, and Asia was among the fastest growing markets,” Power says. “But U.S. companies have come back to build out their large-scale infrastructure for AI and large language models.”
That was particularly apparent in Digital Realty’s third quarter 2024 results, he says. The company signed new leases valued at $521 million in base rent in the period, shattering its previous record in the first quarter of the year by more than double. Leases of roughly 1.25 million square feet in the U.S. account for 87% of that rental income.
Similar to how cloud computing drove global demand for data centers following its U.S. ramp-up, AI data center buildout will expand globally, too, as data sovereignty regulations drive local solutions and as other countries strive to implement the evolving technology, Power predicts.
But as of now, hyperscale customers are racing in the U.S. to prepare for AI’s advancement for the learning stage and then on to the inference stage, where AI models will also incorporate private data sets and other information to make decisions or predictions.
“On their earnings calls, our customers are saying they’d rather be over-invested than under-invested in AI, so we’re building AI infrastructure before we get to a place where all the benefits have come to fruition,” Power says. “It’s life-and-death for some of our customers and their core products.”
Diverse Approaches
Digital Realty’s land bank and expansion strategy suggests that it will be able to meet the demands of those tenants, but power and cooling challenges are ever-present. The REIT has taken conservation steps, such as contracting for 1.4 gigawatts of renewable capacity and pursuing green building certifications for IT capacity.
Additionally, Digital Realty has reconfigured its infrastructure through retrofits and new designs to densify the amount of wattage it can bring to its racks and sees a return to liquid cooling and chilled water loops to appease the high energy appetite and heat signatures of AI chips. Power is also a proponent of tapping nuclear energy and sees some promise in the development of small modular reactors (SMRs) to some day energize data centers.
Given the heavy investment often made in infrastructure like substation power, fiber optics, and redundant power systems that data center development entails, Digital Realty has initiated private partnerships to help finance projects, including in foreign countries. In late 2023, the REIT formed a $7 billion venture with Blackstone-affiliated funds to build four hyperscale projects totaling 500 megawatts in three metro areas on two continents.
“The capital intensity is enormous in this industry, and we saw a need to scale our funding model,” Power says. “We need to have all these arrows in our quiver to support and futureproof our customers’ runway for growth.”
Perhaps what is working most in Digital Realty’s favor is its position in the world’s largest data center markets, supporting cloud availability zones and enterprise IT workloads, which have landed and expanded over the course of the last decade. The company’s technology infrastructure, customer base, connectivity—along with the growing amount of data being stored and available in the market for applications and other services—create a certain amount of information inertia, Power explains. But it’s those high ‘data gravity” markets that typically attract more data center users.
“Companies want to grow where they already are, they don’t want to go to 100 different cities for their IT infrastructure, and we’re not following demand to anywhere on the planet where you can build a data center,” Power says.
“Our view is that due to that confluence of infrastructure, the diversity of customer demand, population density, the proximity of the end users to the data, and GDP (growth), you’re seeing a snowball effect in certain data center markets that’s going to keep building and building,” he adds.