PGIM Real Estate, the real estate investment management arm of PGIM, the asset management arm of insurance company Prudential Financial, is entering the market with a global data center fund, PERE has learned. The company is seeking to raise $2 billion in capital commitments, with a final deadline of July for the value-add PGIM Real Estate Global Data Center Fund, according to an investor document from Boston Retirement Plan reviewed by PERE.
If the fund reaches its target size, it will be the largest closed-end fund the firm has ever raised, according to PERE data. PGIM Real Estate declined to comment on the matter.
The Madison, New Jersey-based investment firm has been investing in data centers through various funds since 2013. Last month, it announced a $600 million joint venture with digital infrastructure company Equinix to develop and operate a 28MW data center in California's Silicon Valley. The deal marks the firm's first investment as part of its purpose-built global data center strategy, according to a press release.
Morgan Laughlin, global head of data center investments at PGIM Real Estate, spoke to PERE about the global opportunity for data center investments, saying that developing new assets in the most established data center markets in North America, Asia Pacific and Europe is “the best opportunity to deploy capital” in the sector.
“The least elastic new supply tends to be in the more developed, tier-one markets with less room for development, which means data center rents and values will see greater upside,” Laughlin said.
He explained that the company's global data center investment strategy is primarily focused on new developments and is operator independent, meaning the company works with different operators in different markets through joint ventures.
“Our model allows us to consider deal flow from multiple sources, from relationships with operators who are identifying land or removing land from their balance sheets, as well as actively acquiring land ourselves and bringing it to operating partners to do joint ventures,” he said.
Laughlin added that operators are increasingly looking for investment partners willing to take on risk in developing new assets. He noted that the biggest demand for data centers still comes from traditional cloud service providers. But since Chat GPT launched two years ago, the proliferation of AI applications has created a sudden surge in demand for data, “catching the industry off guard,” he said. As a result, nearly all operators need additional outside capital to meet the demands of their customer base, he said.
However, the supply of suitable land is a challenge in some tier 1 markets. In Europe, for example, power supply constraints and regulations limiting development have shifted data center investment from key “FLAP-D” markets such as Frankfurt, London, Amsterdam, Paris and Dublin to secondary markets such as Milan, Madrid and Warsaw. For example, in March PERE reported that US asset manager PIMCO had launched its first data center fund, targeting €750 million to develop and acquire data centers across Europe, with a focus on these secondary markets.
While acknowledging that it's difficult to find developable land in FLAP-D markets, Laughlin said PGIM's global strategy is to focus primarily on Tier 1 markets. “Secondary markets such as Berlin, Madrid and Milan remain attractive opportunities, but the total return opportunity is not as strong as in the primary markets because there isn't the same supply and demand imbalance,” he explained.
Capital Market Interest
Growth projections for the data center sector are consistent across the globe, despite development challenges in some markets. According to the Global Data Center Market Comparison 2024 published by Cushman & Wakefield, total data capacity in each major region is expected to at least double based on the current development pipeline. Capacity is expected to grow 2.5-fold in the Americas, 2.2-fold in Asia Pacific, and 2-fold in EMEA, according to the report.
“Data centers as an investment sector are at the forefront of most institutional investors' minds and are already a major part of the alternative investment sector in terms of the amount of capital being directed there,” Laughlin said.
“I've had the opportunity to speak to nearly 100 institutional investors about the data center sector, and broadly speaking, less than 20% of institutional investors are directly investing in data centers. Of those that aren't, 98% are actively exploring how to invest.”
He acknowledged that the fundraising market is “challenged,” as it is for private real estate overall — total fundraising in the first quarter of 2024 was the lowest in 12 years, according to PERE data — but said data centers and debt strategies are “two key areas where investors are actively looking to increase their exposure from a real estate perspective.”
When asked if data centre electricity consumption is a concern for potential investors in the sector, Laughlin said most institutional investors are still determining strategies for measuring and quantifying acceptable ESG strategies in the data centre sector. “For example, you can't invest in data centres using the same sustainability metrics that you've developed for office buildings or residential buildings or logistics, such as carbon utilisation per square metre – that's a metric that's not applicable to data centres,” he explained.
For investors who have developed ESG policies specific to data centers, the focus is on power usage efficiency, he says. The PUE ratio measures the energy efficiency of a data center and can be used by operators and asset owners to drive efficiency improvements at both the server and building level.
Laughlin added that the data centre sector has been “treated a bit unfairly,” with much of the blame being placed on the building environment for high carbon emissions. Rather, he said, the rapid digitisation of the economy and society is driving the demand for data, and the data centre industry exists solely to meet insatiable consumer demand. “The responsibility of the industry is to meet those needs as efficiently as possible.”