Overbuilt data center supply could negatively impact performance

Data centers might be looking at compromised income appreciation, given the level of supply projected to be created between now and 2026, per a Green Street Advisors analysis. While data centers are far and away projected to see the biggest supply growth, investors are keeping an eye to the underlying fundamentals for all types of commercial real estate (CRE).

Considering the recent interest rate hikes and volatility of U.S. financial markets, a recession is now within the realm of possibility in the near-term, though not inevitable. CONTI Capital believes that if a recession is in the cards, it’s likely to have a far smaller negative impact on the labor market and asset values than the recession triggered by the Global Financial Crisis – but it still warrants heightened examination of investment portfolios. In this piece, we are focusing on the various CRE types and their supply projections.

In the event of an economic slowdown, sectors which are overbuilt face the greatest risk of underperformance in the near-term. Over-construction in the data center sector raises legitimate concerns about its near-term fundamentals. Following data centers’ projected annual growth of roughly 12% within the next four years, student housing is expected to hit about 4% growth, followed closely by self-storage and industrial assets.

Forecast apartment supply falls below those sectors, and since CONTI focuses on this segment, we are encouraged by what this suggests for multifamily’s fundamentals – not only is near-term supply forecast to be relatively limited, but demand for housing has remained elevated and is projected to remain so through 2026, leading to optimal apartment occupancy.

Meanwhile, less supply is expected in the office, hotel and retail sectors, all of which have been struggling to maintain stable fundamentals through the COVID-19 pandemic and resulting shifts in work, travel and consumer preferences.

Based on our analyses of multifamily fundamentals, CONTI feels strongly that apartment real estate will perform well even amid the conceivable economic bumps in the road ahead.