Does a data center sleeve count as real estate in your allocation, or as something else?

Question

I was filling in my own allocation sheet and got stuck on where to put this. On paper it's a building with a lease, so it's real estate. But when I read the actual drivers, they're technology company capital spending and electricity access, and neither of those behaves like the things that move my other rentals.

The case for calling it real estate: you own land and a structure, the income comes from a lease, and the residual value question is a property question. If the tenant leaves you still own a powered building in a market where power is hard to get.

The case for calling it something else: the tenant base is concentrated in a small number of very large technology companies, the demand cycle is driven by AI buildout spending rather than population or employment growth, and the asset can be obsolete in ways an apartment building can't. A building whose economics depend on cooling capacity and power density is closer to infrastructure than to a strip center.

Why it matters practically, at least to me. If I file it under real estate, it competes with my other property allocation and I cap it accordingly. If I file it under infrastructure or growth, it comes out of a different bucket and I might size it larger or smaller. Same asset, different limits, purely because of what folder I put it in.

I don't have a settled view. Curious how the room does it.

laurenkim53 · Accepted Answer

I put it in real estate and then set a sub-limit inside that bucket, which I think handles both of your concerns without pretending it's something it isn't.

The reason it's real estate is the one you already gave. If the tenant walks, you're left holding land, a structure, and a utility interconnection. That's a property recovery, and it's the same kind of question I ask about a rural building with a single employer in town. Ownership of the physical thing is what sets the floor.

The reason for the sub-limit is your second paragraph. Correlation to the rest of a property book is low, and the tenant concentration is real. A handful of very large buyers drive most of the leasing. That's a different risk from a 40 unit building where nobody tenant matters. So I'd rather size it as its own line than let it hide inside a general property number.

One thing your framing skips. Power access is the constraint on new supply right now, and that constraint is what protects an existing well-located facility. That's a real estate argument, site quality and scarcity, the same logic as a corner lot in a built-out town. It just happens that the scarce input is electricity instead of frontage.

So, real estate folder, its own cap inside it, and I'd write down the cap before I look at any specific deal rather than after.

renee_dubois · Answer

@hollow's sub-limit answer is what I'd do too, though I'd add that the folder question only bites if you have a hard rule. I don't. I size each position by how badly it hurts if it goes to zero, and that gets me to roughly the same place with less bookkeeping.

Does a data center sleeve count as real estate in your allocation, or as something else?

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