How to make money when your refrigerator orders milk
The U.S. Department of Transportation (DOT) wants cars to talk to nearby cars to aid in safety and maybe target traffic congestion. According to DOT, there are more than 255 million registered vehicles in the U.S.[i] – that’s a lot! Meanwhile, in the air, a single Boeing Dreamliner tracking its flight creates enough data (40TB[ii]) per hour to fill about 57,000 CDs[iii]. On my wrist, my Nike Fuel Band talks to both my phone and laptop, and every piece of information that’s remotely relevant gets measured, transmitted and stored. In my kitchen, my smart refrigerator complains to my microwave that the embedded music system never plays Perry Como, because it’s fixated on Katy Perry.
As a real estate investor, my company AACA is drawn to stocks of companies that possess certain characteristics. We look for businesses that operate in sectors that have few competitors, where the real estate they own is in markets with very high barriers to entry, where the tenants have practical, locational, or physical issues that prevent them from moving, and lastly where the tenants or users are experiencing strong secular growth. In our opinion, data centers and cell phone tower operators fit the bill for these characteristics. I’m going to be speaking about this and more in an upcoming webinar on August 27th. I welcome you to attend (Register here).
What are data centers?
Data centers are giant high-tech facilities used to house computer systems and associated components such as telecommunications and data storage. They are ultra-secure buildings outfitted with redundant systems including power-supplies, security and communication systems, environmental controls, blast and EMP (electro-magnetic pulse) protection. These buildings use as much electricity as a small town. Perhaps you have seen data centers in the movies. Any good action hero – like Tom Cruise in Mission Impossible – invariably needs to retrieve a secret data file from one of these impossibly-complex-weapons-grade facilities at some point in the plot.
But in our opinion, “the Internet of Everything” is a massive secular demand driver for these companies. The possibilities are nearly endless. Some are trivial, such as my Nike Fuel Band or my refrigerator telling me I am out of soy milk (don’t even ask) and some are crucial, like medical devices chatting with one another to update the health status of a nursing home population or hospital. Soon wearable computing is likely to be as ubiquitous as cell phones are today and the sheer amount of data these items will gather, store, share and access boggles the mind.
Accelerated demand for data storage
Perhaps you have heard the saying that 90%[iv] of the world’s data was created in the past 2 years. Activities that previously were non-data producing, like hailing a cab (UBER) and dating (eHarmony), are now at the center of the digital revolution. All this data has to be stored somewhere and the demand is growing. Morgan Stanley says the number of devices connected to the internet will exceed 75 billion[v] by the year 2020 – that’s about 10 connected devices per person for every man, woman, and child. We believe this is a long-term trend that may make for a good long-term investment.
If you take this to its logical conclusion, huge quantities of currently inert non-connected items will start connecting, talking, communicating, and eating up bandwidth. As more and more people connect and create data, all these products will need to store data in the cloud, housed physically in data centers and will need to transmit that information via cell phone towers and other wireless networks. Cisco’s expectation for wireless bandwidth is that global mobile traffic will grow almost 10 fold between 2014 and 2019[vi]. We like this.
Development yields vs. traditional real estate
Data center real estate investment trusts (REITs) develop and operate the buildings that house the cloud which can potentially generate compelling profits. Due in part to the surging demand and lack of supply (these buildings are very difficult – nearly impossible – to build), data center returns and development yields have been different than the returns of more generic real estate sectors.
While growth in this sector is in some way a blinding glimpse of the obvious, we don’t think it’s actually baked into the numbers. Each time available bandwidth has increased, previously unimagined applications pop up to absorb that bandwidth and store that information. No one would have predicted 5 years ago that kids would have Facebook’s mobile app open on a smartphone 24 hours a day running in the background.
There is a lot of research that needs to go into understanding the sector, which represents a small part of real estate overall. We are seeing an overwhelming secular demand in data centers and cell phone towers, and continue to actively manage our exposure to the sector. If you’ve ever wondered how to allocate real estate in your portfolio, you can download our recent whitepaper (here) on real estate in Modern Portfolio Theory.
To hear more from Burl East, Register here for the webinar on August 27th, 2015.
[i] Source: U.S. Bureau of Transportation Statistics https://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States#Total_number_of_vehicles)
[iii] assumes 700MB size CDs (40TB/700MB = 57,143)
[iv] Source Science Daily http://www.sciencedaily.com/releases/2013/05/130522085217.htm
[v] Source Morgan Stanley http://www.businessinsider.com/75-billion-devices-will-be-connected-to-the-internet-by-2020-2013-10