- Prologis, the nation's biggest owner of warehouses, has hired a veteran data center executive.
- Warehouses often have attributes that make conversions to data centers feasible.
- The move by Prologis comes as warehouse growth begins to slow and data centers boom.
Prologis, the nation's largest owner of warehouse properties, plans to spend billions of dollars building data centers as artificial intelligence and a proliferating digital footprint fuels demand for large computer storage and processing facilities.
To help lead that effort, the San Francisco-based $122 billion public company has hired an industry veteran, Chris Curtis, who cofounded Compass Datacenters in 2011.
Curtis, who is 53 and based in Dallas, left Compass in January. He said he was drawn to Prologis by its size. Globally, the company controls more than a billion square feet of industrial property, including millions of square feet that can potentially accommodate data centers.
He will fill the newly created role of global head of data centers at the firm.
"In the data center business at this point in time, you need scale," Curtis said. "There's a very large opportunity here."
Prologis's push exemplifies the growing interest among investors in data center deals, including players who have not traditionally been involved in the highly specialized industry.
Among them are owners of warehouse spaces who see an opportunity to adapt or repurpose portions of their portfolios. Warehouses have squat footprints similar to data centers and are often located in industrial areas that have proximity to the heavy electrical lines and equipment necessary to deliver voluminous power that data centers require.
"A lot of the same location attributes that make for very compelling data center sites are the same location attributes that make for very compelling industrial sites," said Michael Hochanadel, a managing director at the real estate and infrastructure investment firm Harrison Street, who oversees its roughly $4 billion data center portfolio.
Hochanadel said that Harrison Street recently entered into discussions with the owner of a large warehouse property to partner together to redevelop the building into a data center. He said it was the "type of conversation we're having in multiple instances across multiple markets."
"Prologis is probably the highest profile example of a traditional industrial player that's evaluating the space," Hochanadel said. "They're certainly not the only one."
During an investor conference call on December 13, Joseph Ghazal, Prologis's chief investment officer, said the company has plans to develop up to $8 billion of data centers in the next 5 years across roughly 20 property sites. Longer term, Ghazal said, the company could have as many as 100 data center projects. That could represent an investment of more than $25 billion into the sector – a sum that would make Prologis one of the largest developers in the data center business.
"There is insatiable demand," Hamid Moghadam, Prologis's CEO, said during the call, speaking of the data center market. "We can see easily 10, 15, 20 years of projects out there."
Warehouse growth slows as data centers accelerate
Demand for data centers has steadily grown over the past decade, driven by the widespread use of cloud computing and storage across corporate America. The facilities provide the computers and equipment that host websites, power software, and provide for functions that are increasingly critical in everyday life, such as streaming video, autonomous driving, and mobile applications.
The arrival of artificial intelligence, which requires huge processing power, is expected to lift demand even further.
The real estate services firm JLL said that 4.3 gigawatts of data center space was leased by users in 2023, a record amount. In major markets across the country, developers are building 5.3 gigawatts of new facilities, "enough energy to power all the households in the San Francisco metro area," JLL said.
In a January report, Morgan Stanley estimated that the data center industry in the US could grow as large as 18.1 gigawatts by 2027, more than double its current size. Over half of that growth may be driven by demand from artificial intelligence customers, the investment firm noted.
Some of the largest investors in the world have seen the business as a jackpot opportunity. Blackstone, for instance, has said it plans to develop as much as $50 billion of data centers in the coming years.
For warehouse owners such as Prologis, the data center industry's immense prospects come as growth in their core logistics businesses have begun to slow after a record period.
Warehouse rents rose by about 5% annually between 2014 and 2019, according to Vince Tibone, an analyst at Green Street who covers the industrial market. In 2021 and 2022, rental rates skyrocketed in the sector, growing by 16% and 25% respectively, as the pandemic drove shoppers online, boosting e-commerce. But in 2023, a record 500 million of new industrial space was brought to market, outstripping demand and diminishing rental growth.
This year, Green Street projects warehouse rents will rise by 2% to 3%.
"You do have this period of a lot of new supply when demand isn't as strong," Tibone said, noting that he expects warehouse rents to return to 5% growth in 2025.
Data centers could help bolster Prologis's returns during a slowdown.
"Why is this compelling for us?" Ghazal, the company's chief investment officer, said during the investor forum. "Because margins for the conversion of data centers are 50% to 100% higher than industrial margin, providing us an outsized value creation."
Ron Kamdem, the head of US REITs and commercial real estate research at Morgan Stanley who covers Prologis, said that he expects operating income within the company's industrial portfolio to grow between 8% to 10%, but by "double digits" in its burgeoning data center business.
Prologis executives indicated that the firm plans to sell data center projects it builds and then leases and pour the cash back into its warehouse business.
"We want to just do these deals with these large customers and then replace our capital," Moghadam said, noting also that this strategy "may change."
Data centers are complex and expensive
Data center development may be lucrative, but it is also riddled with complexities. The industry sits at a tricky juncture between the real estate, technology, and energy businesses. Players need to have the know how to design facilities with the computer processing, cooling architecture, and network connectivity that sophisticated users want.
Major customers in the business include the world's largest tech companies, including Amazon, Google, and Microsoft, which rely on data centers for their cloud computing businesses and as the infrastructure behind their own digital platforms.
Entrants to the business, particularly from the warehouse industry, may also find the costs prohibitive.
Carl Beardsley, a senior managing director at JLL who leads its data center capital markets practice, said that data centers can cost as much as $2,400 per square foot to build, compared with about $150 per square foot for a traditional warehouse.
"There is an art of being able to bring in that capital," Beardsley said. "We are seeing a lot of pension funds get in the space, international capital coming in, sovereign funds coming in."
Access to the massive megawattage data centers need to operate is also becoming more difficult to procure as grids run dry of surplus power.
"Honestly, it's all about how much power can you get" and "how quickly you can get that power," Beardsley said.
Prologis executives have said they are confident the company will be able to plug the projects they envision into the grid.
"We have 46 applications in, specifically for our pipeline today on getting power," Moghadam, Prologis's CEO said during the investor forum, speaking of the efforts the company is taking with utilities. "And we're making great progress on them."
Brookfield bought new hire's previous company
Chris Curtis launched Compass Datacenters with Chris Crosby more than a decade ago and grew the firm into a well-known brand in the business. Brookfield, the Canadian real estate and infrastructure conglomerate, led an investment group that purchased the company in 2023 for $5.5 billion.
Compass is perhaps best known as one of the developers behind a huge new data center project in Prince William County in Virginia that recently received local approvals to proceed. Known as Digital Gateway, the project will total more than 3 gigawatts of capacity, making it one of the largest data center developments in the country. QTS, a data center firm owned by Blackstone, will develop the project alongside Compass.
Curtis said that during his tenure leading development at Compass, he "would always bump into" Prologis as he searched for new land parcels that could accommodate a data center because" they always had the best sites in every market around the world."
"The DNA is very similar to my DNA and then the platform offers so many opportunities," Curtis said. He noted how Prologis has pushed into emerging areas of the economy that – like data centers – are tethered to the energy market, including electric vehicle charging, renewable power production and procurement, and large scale battery storage that can harvest and store electricity to alleviate demand on the grid.
"When we go to talk to a utility, we don't just ask for things," Curtis said. "We can help."