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What's Next For Commercial Real Estate? Data Centres or Fulfilment Centres?

With the normalisation of hybrid and remote working following the pandemic, and the consequences for office and retail space, two business models within commercial real estate have gained traction in the new normal. Data centres and fulfilment centres, epitomised by the likes of Amazon warehouses, are emerging as key players in the evolution of commercial real estate. This article takes a closer look at each business model, exploring factors such as upfront costs, maintenance costs, income generation, and secondary market liquidity.



Data Centres: The Digital Fortresses

 

Upfront Costs: Establishing a data centre demands a substantial initial investment. Infrastructure, high-performance servers, cooling systems, and advanced security measures contribute to a hefty upfront cost. However, the increasing demand for digital services and cloud computing positions data centres as long-term assets, justifying the initial expense.

 

Maintenance Costs: Ongoing operational costs for data centres primarily revolve around electricity, maintenance of high-tech equipment, and cybersecurity measures. These costs are continuous but can be offset by long-term contracts with tech companies, ensuring a steady income stream.

 

Income Generation: Data centres generate income through leasing server space to businesses, cloud service providers, and IT companies. The recurring revenue from lease agreements forms a stable financial foundation, and the potential for scaling operations enhances income prospects over time.

 

Secondary Market Liquidity: While the secondary market for data centres is not as robust as traditional real estate, the increasing demand for digital infrastructure has sparked interest from institutional investors. Specialized real estate investment trusts (REITs) focusing on data centres, such as Digital Realty Trust and Equinix, provide avenues for liquidity.

 

Fulfilment Centres: Warehouses of the E-commerce Era

 

Upfront Costs: Establishing a fulfilment centre, exemplified by the sprawling Amazon warehouses, requires a significant upfront investment in real estate, automation technology, and logistics infrastructure. The location of the facility is crucial for efficient supply chain operations.

 

Maintenance Costs: Ongoing maintenance costs include staffing, facility upkeep, and technological upgrades to streamline order fulfilment processes. Automation technology investments, while reducing labour costs, contribute to maintenance expenses.

 

Income Generation: Fulfilment centres generate income through lease agreements with e-commerce giants or retail businesses seeking efficient storage and distribution solutions. Additionally, revenue may be derived from third-party logistics partnerships and value-added services.

 

Secondary Market Liquidity: Fulfilment centres benefit from robust secondary market liquidity, given the consistent demand for logistics infrastructure. Institutional investors and real estate developers often trade in these assets, and publicly traded REITs like Prologis specialize in industrial real estate, including fulfilment centres.

 

Companies Investing in Both Models

 

Several companies recognize the synergies between data centres and fulfilment centres, investing strategically in both sectors. Amazon, a trailblazer in e-commerce, operates an extensive network of fulfilment centres while also investing in data centres to support its cloud computing arm, Amazon Web Services (AWS). Similarly, tech giants like Google and Microsoft are not only expanding their data centre portfolios but also investing in logistics and fulfilment infrastructure to support their e-commerce and cloud services.

 

In conclusion, the future of commercial real estate is intricately woven with the evolution of data centres and fulfilment centres. As technology continues to reshape industries, investors navigating this landscape must carefully weigh the upfront costs, maintenance considerations, income prospects, and secondary market dynamics inherent to each business model.

 

Q&A Section

 

1. What is a REIT?

 

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate across various sectors. REITs offer investors an opportunity to access diversified real estate portfolios without directly owning the physical properties.

 

2. How does secondary market liquidity work?

 

Secondary market liquidity refers to the ease with which an asset, such as real estate, can be bought or sold on the open market. Liquidity is influenced by factors like investor interest, market demand, and the availability of buyers and sellers.

 

3. What is cloud computing?

 

Cloud computing involves the delivery of computing services, including storage, processing power, and software, over the internet. Users can access and utilize these services remotely, often on a pay-as-you-go basis, without the need for physical infrastructure.

 

Learn more

 

For further information, please contact info@langdoncap.com

 

About the author

 

Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.

 

About Langdon Capital

 

Langdon Capital assists innovative, high-growth companies, with >£1m in annual revenue and >30% in annual revenue growth, raise between £1m and £25m in debt or equity at Series A and later funding rounds from a network of alternative investors spanning venture capital funds, corporate VC arms, family offices, venture debt funds, private credit funds, real estate funds and hedge funds.

 

 

 

This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.

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