Leasing by the Kilowatt, Not the Square Foot
Unlike most commercial property, data center space is priced and sized primarily around power density — the amount of electrical load, expressed in kilowatts per rack, that a facility can deliver and cool. The true capacity constraint is usually the site's power and cooling infrastructure, not its floor area, so a smaller facility with high power density can support far more equipment (and command more rent) than a larger facility with low power density.
Colocation vs. Hyperscale
Colocation facilities serve multiple tenants who each lease individual racks, cages, or suites while sharing the building's power, cooling, and security infrastructure. Hyperscale facilities, by contrast, are typically built to suit for a single large cloud or technology tenant that occupies an entire building or campus, often under a long-term, custom-negotiated lease.
Long Leases with Credit Tenants
Data center leases, especially hyperscale and larger colocation deals, commonly run 10 to 20 years or longer on a triple-net or near-triple-net basis, with the tenant responsible for most operating costs. Because major tenants are frequently large, investment-grade cloud or technology companies, valuation is heavily influenced by tenant credit quality and remaining lease term, similar to a corporate credit lease.
The Cost and Risk of Building Power
Data centers are expensive to build, requiring substantial investment in generators, uninterruptible power supplies, cooling systems, and utility substation capacity. Power availability from the local utility, not land or entitlements alone, is often the binding constraint on new supply, and rapidly rising power density requirements (driven in part by more power-intensive computing workloads) create ongoing risk that existing facilities become technologically obsolete without significant reinvestment.
Typical Tenants
- Hyperscale cloud and technology companies
- Colocation operators
- Enterprise IT departments
- Telecommunications and network providers
Key Underwriting Metrics
- Power density (kW per rack)
- Total critical IT load capacity (MW)
- Power usage effectiveness (PUE)
- Weighted average lease term (WALT)
- Tenant credit rating
- Redundancy/uptime tier (e.g., Tier III/IV, N+1)
Major Risks
- Power and utility interconnection constraints limiting expansion
- Technological obsolescence as density and cooling requirements evolve
- High re-tenanting capex if a major tenant vacates
- Tenant concentration among a small number of very large users
- Long construction lead times and potential cost overruns
Typical Lender Fit
- Life insurance companies favor long-leased, investment-grade credit tenant deals
- Debt funds finance shell/core construction and powered-land positioning
- CMBS increasingly securitizes stabilized, leased data center loans
- Banks provide construction and bridge financing for build-to-suit projects
How It Makes Money
- Base rent tied to leased power and space, often on a triple-net basis
- Power and utility pass-throughs/reimbursements
- Cross-connect and connectivity fees in colocation facilities
- Contractual rent escalations under long-term credit tenant leases
Power Density
Power Density (kW/rack) = Critical IT Load (kW) ÷ Number of Racks
- Critical IT Load
- — Total electrical load supported for IT equipment (kilowatts (kW))
- Number of Racks
- — Count of equipment racks served by that load (racks)
Power density tells you, on average, how much electrical capacity each equipment rack in the facility can draw. Higher power density generally means the facility can support more computing capacity in the same footprint, which is why data centers are leased and priced around power rather than square footage alone.
Worked example: A data hall has a critical IT load of 2,400 kW distributed across 300 racks. Power Density = 2,400 kW ÷ 300 racks = 8 kW/rack.
Colocation vs. Hyperscale Data Centers
| Factor | Colocation | Hyperscale |
|---|---|---|
| Tenant profile | Many tenants sharing one facility | Single large cloud/technology tenant |
| Lease term | Often shorter, cage/rack-level leases | Very long term, often building- or campus-wide |
| Typical size | Individual racks, cages, or suites | Entire buildings or multi-building campuses |
| Power density needs | Varies by tenant, moderate on average | Very high, purpose-built to tenant specification |
Power Availability Drives Value More Than Location
A data center site is only as valuable as the electrical power it can secure from the local utility. Before relying on projected expansion or rent growth, confirm actual committed power capacity and interconnection timelines rather than assuming power will be available on demand.
Module Check
Data center leases are primarily sized and priced around which factor?