The data center industry is undergoing a transformative era, driven by the escalating demand for digital services, cloud computing, and the rise of artificial intelligence (AI). This unprecedented growth has positioned data centers as a vital component of the digital economy, offering substantial opportunities for investors. JLL’s 2025 Global Data Center Outlook highlights the extraordinary momentum in the sector, forecasting a compound annual growth rate (CAGR) of 15% through 2027, with the potential to reach 20%. As the industry grows, investment-grade data centers have emerged as a lucrative asset class, offering high returns and resilience. However, the sector is not without challenges, including power constraints, supply-demand imbalances, and the high costs of development. This article provides an in-depth examination of the data center market, exploring large hyperscale facilities, smaller edge data centers, the role of Real Estate Investment Trusts (REITs), and critical trends shaping the future of this dynamic industry.
Large data centers, often referred to as hyperscale facilities, are the backbone of cloud computing and enterprise-level digital services. These facilities, typically exceeding 100,000 square feet in size, support the extensive infrastructure needs of tech giants like Amazon, Google, and Microsoft. For instance, hyperscale facilities in Northern Virginia, a leading data center hub, can reach sizes upwards of 700,000 square feet with a capacity of 60 megawatts. The cost of constructing such a facility ranges from $600 to $1,100 per gross square foot, translating to a total investment of $420 million to $770 million. These centers cater to the increasing demand for AI and machine learning workloads, which require significant computational power. Advances in graphics processing units (GPUs) have driven higher rack densities, increasing from 40 kilowatts (kW) to as much as 130 kW per rack. Future projections indicate that densities could reach 250 kW, necessitating innovative cooling solutions such as liquid cooling and immersion cooling systems. This shift underscores the importance of technological adaptation and sustainability in maintaining the operational efficiency of hyperscale facilities.
While hyperscale data centers dominate the industry, smaller and edge data centers are emerging as critical players, addressing the needs of localized and latency-sensitive workloads. These facilities, typically ranging from 1,000 to 10,000 square feet, are designed to support applications like the Internet of Things (IoT), autonomous vehicles, and real-time analytics. Edge computing, which brings data processing closer to the end user, is experiencing rapid growth, with projections indicating a CAGR of 19% from 2023 to 2030, reaching a market size of $19 billion by the end of the decade. Smaller data centers offer several advantages, including lower capital requirements and the ability to serve underserved markets. Construction costs for these facilities average $1,000 per square foot, making them more accessible to small-to-medium enterprises and boutique investment firms. Furthermore, smaller data centers often serve a diversified tenant base, including regional businesses, healthcare providers, and educational institutions, providing stable cash flows and reducing risk.
The rise of AI and digital transformation has amplified energy demands across the data center industry. While data centers currently account for approximately 2% of global electricity consumption, this figure is expected to double over the next five years due to the clustering of facilities in metropolitan hubs such as Northern Virginia, Tokyo, and London. These regions face significant power-transmission bottlenecks, with delays in substation and transmission line construction further exacerbating the issue. Developers are exploring alternative energy solutions to address these challenges, including the adoption of natural gas, fuel cells, and renewable energy systems such as solar and wind. Small modular reactors (SMRs) are also gaining attention as a scalable and carbon-neutral option for powering high-performance computing applications. Although commercial deployment of SMRs in the United States is unlikely before 2030, their potential as a sustainable energy source is undeniable.
Investing in data centers, whether through direct ownership or Real Estate Investment Trusts (REITs), offers a pathway to capitalize on the industry’s growth. Data center REITs have emerged as a popular investment vehicle, providing exposure to a diversified portfolio of facilities while mitigating the risks associated with direct ownership. Leading players in this space include Digital Realty Trust, Equinix, and American Tower Corporation. Digital Realty Trust, for instance, manages a vast network of data centers across strategic global locations, supporting clients with robust colocation and interconnection services. Equinix, the largest data center REIT by market capitalization, operates over 200 facilities in 52 markets on five continents, offering unparalleled interconnection opportunities for businesses. American Tower Corporation, traditionally focused on cell towers, has expanded into the data center space through its acquisition of CoreSite Realty Corporation. This diversification highlights the adaptability of REITs in addressing the evolving needs of the digital economy.
The financial dynamics of the data center industry are equally compelling. Construction costs, typically ranging from $7 million to $12 million per megawatt of commissioned IT load, reflect the high capital requirements of these facilities. Despite these costs, the sector has attracted record levels of financing, with JLL predicting continued growth in trading volumes for 2025. Single-tenant facilities, in particular, offer attractive investment opportunities due to their long-term leases and strong returns. However, significant barriers to entry, including high capital requirements and lengthy development timelines, have limited competition, creating opportunities for well-capitalized investors.
The future of the data center industry will be shaped by several key trends, including mergers and acquisitions, advanced cooling technologies, and the rise of hybrid models. While large-scale mergers may slow, joint ventures are expected to rise, particularly in developing markets where local partnerships can navigate regulatory and political landscapes. Advanced cooling technologies, such as liquid and immersion cooling, are set to become the standard for high-performance facilities as rack densities continue to increase. Hybrid data center models, which combine colocation, edge, and cloud services, offer flexibility to tenants and optimize the utilization of physical infrastructure.
The rapid growth of the data center industry presents both opportunities and challenges for investors. Large hyperscale facilities remain the cornerstone of the market, driving technological innovation and meeting the demands of AI and cloud computing. However, smaller and edge data centers offer compelling opportunities in underserved and latency-sensitive markets, providing a diversified approach to investment. As the industry evolves, a focus on sustainability, innovative financing models, and technological adaptation will be critical for maintaining competitiveness and achieving investment-grade returns. By understanding the nuances of the data center market and aligning with key trends, investors can position themselves to capitalize on the sector’s long-term growth and resilience.
