Quick Take: While chipmakers and software developers capture headlines, investors researching the best data center REITs for the AI boom should also consider companies like Digital Realty Trust (NYSE: DLR). Data center owners provide essential infrastructure as Big Tech giants invest tens of billions in hyperscale facilities to meet AI processing demands, with recurring rental income supporting their business models.
The Exponential Growth of AI Infrastructure and Power Demand
The AI story shows no signs of cooling.
Instead, it’s only set to get hotter.
For one, according to Grand View Research, the global AI boom could grow from about $137 billion in 2022 to more than $1.81 trillion by 2030. In addition, artificial intelligence-related spending will make up about 8% to 10% of IT budgets in 2024, according to Wedbush.
Big Tech’s $40 Billion Data Center Capex Supercycle
Two, companies like Microsoft and Amazon earmarked $40 billion for investments in AI-related and data center projects all over the world.
Even Apple is still exploding on its AI news.
All after the tech giant introduced a range of new AI features, including an upgrade to its voice assistant Siri, integration with Open AI’s Chat GPT, and new writing assistance tools.
As noted by CNBC, “Analysts from Morgan Stanley said Apple’s AI features strongly position the company with ‘the most differentiated consumer digital agent.’ Additionally, the analysts believe that the features will drive consumers to upgrade their iPhones, which should accelerate device replacement cycles.’”
Even more impressive, according to Goldman Sachs, far more power generation capacity will be need to accommodate that massive growth. One way to trade that is by picking up real estate investment trusts that own the data centers supporting AI growth.
Top Data Center REIT Pick: Digital Realty Trust (NYSE: DLR)
1. Global Scale and Hyper-Scale Leasing Absorption
Look at Digital Realty Trust (SYM: DLR), for example.
With a yield of 3.2%, the real estate investment trust owns data centers around the world. All of which are seeing substantial demand with the AI boom. Helping, analysts at BMO Capital just upgraded DLR to outperform.
As noted by the firm, “We believe DLR remains well-positioned as a play on the AI-thematic, particularly within REITs, with room for further multiple expansion. Data center net absorption continues to set records (N. America leasing of ~4GW in 2023 and 5.5-6GW expected in 2024), supported by ongoing investments from hyper-scales as they develop their AI capabilities,” as quoted by Seeking Alpha.
Real estate trusts possessing prime land power connectivity and global network density act as strong economic moat stocks, protecting rental yields across market cycles.
2. 3.2% Dividend Yield and Earnings Multiple Expansion
Investors leveraging REIT dividend yields for long-term income can use Portfolio Payouts to map out monthly payout schedules.
Frequently Asked Questions About AI Data Center REITs
Q1: Why are Data Center REITs considered a smart way to invest in AI?
A: Data Center REITs provide physical server space and power connectivity to tech companies. Investing in data centers allows exposure to AI growth while receiving steady dividend income, avoiding the single-stock volatility of tech hardware manufacturers.
Q2: How does power demand impact data center REIT performance?
A: AI algorithms and large language models require significantly more electrical power and cooling than traditional cloud workloads. This makes data center REITs worth considering when evaluating the best data center REITs for the AI boom, particularly those with secured grid access and high-density power connections that can command premium rental rates.
Q3: What is the dividend yield of Digital Realty Trust (DLR)?
A: Digital Realty Trust (NYSE: DLR) historically offers a dividend yield of around 3% to 3.5%, backed by multi-year leases with global hyper-scale clients like Microsoft, Amazon, and Google.
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Written by Ian Cooper