Data Centers Do Not Belong in Core Open-End Funds

What's New

Data centers are too large, capex-heavy and hard to value to belong in core open-end real estate funds. Josh Pristaw, President of Clarion Partners, argues this in a conversation with Michael Sidgmore on Alt Goes Mainstream. A single data center can cost $5 billion to $10 billion. The largest open-end funds hold $10 billion to $20 billion in total. Allocators in evergreen real estate funds should check how much of the NAV could not be sold quickly in a redemption wave.

Why It Matters

Most development capital in data centers has gone into building assets to sell to core buyers. Pristaw says there is not enough core capital to buy them at the returns developers need. If redemptions hit a fund holding them, managers will sell liquid industrial and multifamily assets instead. Clarion holds about 95% of its capital in open-end funds and expects to be a buyer when those forced sales come.

By The Numbers

• $500 million: The largest single asset Clarion holds in its open-end funds, a cap set by design.

• $1 trillion: New data center supply, by the Jones Lang LaSalle estimate Pristaw cites.

• 10,000: Americans turning 80 every day. About 10% move into senior housing.

• 5x: The increase in senior housing construction needed over today's pipeline. It would have to hold for 15 years.

Memorable Quotes

• "I have not met a person who tries to articulate what the value of the data center is worth 10 or 15 years from now when the tenant leases up." The terminal value problem in one line.

• "I don't think data centers are a bad investment." His objection is about the vehicle, and he says so.

• "I underestimated the importance of liquidity and having a really broad base of people that could buy these assets." The Brazil lesson behind his caution.

• "There'll be more sellers than buyers and it will be difficult to get liquidity in that." His forecast for data centers in core funds.

The Wrap

Pristaw's view holds while data center trades stay rare and terminal values stay unknown. It weakens if a deep core buyer base forms for leased data centers, giving funds a reliable exit. A wave of redemptions from wealth investors would test it from the other side. Evergreen funds holding data centers would have to sell their liquid assets first. Fund flows and data center trade volumes over the next 2 to 3 years will show which way it breaks.