Turning Vacant Office Spaces into Goldmines: The Rise of Data Centers

July 27, 2023

Post Category : borrow money, Commercial, Lending, Loan

Introduction

In a world where data is the new oil, storage and processing facilities, known as data centers, are the refineries that keep the wheels of our digital existence turning. Transforming vacant office spaces into local data centers has become an increasingly popular investment strategy in California, promising high long-term ROI as demand for these facilities grows exponentially.

Key Reasons to Consider Upgrading

With digitalization permeating every aspect of our lives and businesses, the demand for data storage and processing has never been higher. For California investors who are forward-thinking and open to innovative strategies, converting commercial properties into data centers offers a variety of benefits:

Increased Demand: Digital transformation across industries is driving a need for data storage and processing facilities, making data centers a lucrative investment.
High Potential Returns: Given the rising demand, data centers can offer substantial long-term returns.
Tax Incentives: The State of California offers attractive incentives for data centers, adding to the financial appeal of such projects.

Examples

USC Data Center – The University of Southern California invested heavily in transforming a vacant space into a state-of-the-art data center. The 74,000-square-foot facility houses the university’s vital information systems and supports research computing resources. This technologically advanced building is LEED Gold certified and features efficient cooling and power systems, significantly reducing operating costs.
EdgeConneX, Sacramento – A leading global data center provider, EdgeConneX transformed a Sacramento warehouse into a state-of-the-art data center. The facility offers nearly 9,500 square feet of space, an additional 2,386 square feet of raised floor space for tenant racks, and advanced features like high-density power management and disaster-resilient infrastructure.
RagingWire – An NTT Communications company, RagingWire converted a commercial building into a high-tech data center in Sacramento, leveraging its geographical position to serve West Coast clients better. The center offers clients remote hands and eyes, Class A office space, and dedicated long-term storage.

These examples underline the potential for converting vacant office spaces into data centers. These conversions meet the growing demand for data storage and processing and represent a substantial ROI opportunity for real estate investors in California.

Incentives

California offers various incentives for investors venturing into the realm of data centers. Here are a few:

Sales and Use Tax Exclusion (STE): Provided by the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA), this incentive can be applied to the purchase of equipment for data centers.
Research & Development Tax Credit: This credit can be used by companies innovating and improving their data center technologies.
Employment Training Panel (ETP) Funds: ETP funds can be accessed for staff training, an essential component of running an efficient data center.

How to Get Started

Before embarking on the journey of converting a commercial property into a data center, here are a few things to consider:

Technical Feasibility: Conduct a thorough assessment to determine if the property can support a data center’s technical requirements, including power supply, cooling systems, and physical security.
Location: Consider factors like natural disaster risks, local climate (for cooling efficiency), and client proximity
Regulatory Compliance: Familiarize yourself with California’s regulations related to data centers, including environmental and safety norms.
Team Assembly: Assemble a team of experts to help you navigate the complex conversion process.

Payback Period

Investors always seek to understand when their investments will begin to yield returns. The payback period is a critical metric that helps identify how long an investment will take to pay off its original cost. It is calculated using the formula: Investment Payback Period = (Initial Invested Capital / Annual Cash Flow).

Given the complexities and costs involved, determining a reasonable payback period for commercial real estate improvements like data center conversions requires a thorough understanding of the data center market and the financial aspects of data center construction and operation.

For data centers, the payback period can vary significantly depending on multiple factors, including the initial investment cost, operational expenses, and revenue generated from the data center’s services. However, industry reports suggest the data center payback period is 7 to 10 years.

Keep in mind, however, that the lifespan of a data center is typically around 15-20 years. Given the growing demand for data storage and processing, a well-planned and efficiently managed data center can potentially start to generate profit well within its lifespan.

Let’s take a look at some of the factors that impact the payback period for a data center:

Initial Capital Investment: This includes the cost of acquiring the warehouse, the costs associated with converting it into a data center (such as construction, installing IT hardware, and other data center infrastructure), and any additional upgrades needed to meet regulatory standards.
Operating Costs: These include the ongoing expenses for running the data center, such as power, cooling, maintenance, security, and staff salaries. Implementing energy-efficient technologies and best practices can significantly reduce these costs, shortening the payback period.
Revenue Generation: This is the income from leasing the data center’s services to clients. The demand for data storage and processing services is high, and data centers can command significant fees, particularly in technology-heavy areas like California.
Tax Incentives and Grants: Numerous incentives are available to businesses investing in data center upgrades, which can significantly reduce initial investment costs and shorten the payback period.

Understanding these factors will provide you with a clearer picture of the potential payback period for your data center investment. Furthermore, consulting with financial advisors or data center experts who can provide more precise, personalized estimates based on your specific circumstances is advisable.

Remember, while the payback period is a crucial metric, it’s only one part of the investment picture. It’s equally essential to consider other financial measures such as ROI, Internal Rate of Return (IRR), and Net Present Value (NPV) to assess the investment’s profitability comprehensively.

This venture is not only about short-term gains; it’s a strategic long-term investment that could lead to substantial returns as the digitalization trend accelerates. As such, converting your industrial property into a data center in California could represent an excellent investment opportunity.

Conclusion

Transforming commercial properties into California data centers is an opportunity worth exploring. This venture promises attractive returns with the rise in demand for data storage and processing facilities. Contact the Evoque Lending team and learn more about commercial financing.