The Data Center Land Grab Hiding Inside Industrial Real Estate
Min 1
Prologis CEO Hamid Moghadam stated publicly that every warehouse converted to a data center adds $500 per square foot in value, and now the world's largest industrial REIT plans up to 13 buildings on 576 acres near Shelbyville, Illinois, as part of a strategy to scale data center capacity to 10 gigawatts over the next decade. CBRE data shows the vacancy rate for data centers in primary markets hit a record low of 2.8% in the first half of 2024 while primary market under-construction projects will reach record highs in 2025, yet power supply struggles to keep up with demand and extends construction timelines 24 to 72 months. Prologis sold a converted Chicago warehouse data center to HMC Capital in late 2024, demonstrating the liquidity available when logistics infrastructure meets digital demand. Industrial warehouse developers like Panattoni followed Prologis into the sector, with President Doug Roberts stating that data centers present the same opportunity as the shift from traditional distribution centers to ecommerce fulfillment sites a decade ago.
Min 2
Data center tenants pay rent on a dollar-per-kilowatt basis for turnkey facilities, fundamentally different economics than the per-square-foot model industrial landlords know, and this pricing structure rewards properties with power infrastructure already in place. The average asking rent for industrial space grew to $10.13 per square foot in Q4 2024, up 4.5% from a year earlier and 61% from 2019, according to Savills, yet Mark Russo noted tenants renewing leases signed in 2020 or 2021 face rents up 2 to 3 times from 5 years ago. Data center pricing continues rising due to limited supply and strong demand, with CBRE projecting another 10% to 15% pricing increase in 2024 following a 16% year-over-year increase in 2023. Industrial landlords sitting on properties near power substations, fiber networks, and cooling water access can capture this spread by converting existing structures or ground-leasing land to data center developers.
Min 3
Industrial properties near Northern Virginia, Silicon Valley, Dallas-Fort Worth, Atlanta, and Chicago trade at traditional logistics cap rates of 5.7% to 6.5%, but the same dirt rezoned for data centers commands institutional allocations targeting 11.2% returns according to CBRE's analysis of digital infrastructure performance. Operators who acquire industrial land at $150,000 to $300,000 per acre in secondary markets with power availability can flip entitlements to data center developers at $500,000 to $800,000 per acre, capturing the spread without building anything. Charlotte benefits from Duke Energy's power availability and transmission infrastructure, Denver increases data center inventory at impressive rates, and Austin-San Antonio sees significant investor interest due to land availability and tax incentives according to CBRE's 2024 outlook. The dollar math reveals that a 50-acre industrial site purchased at $10 million and rezoned for data center use within 18 months sells for $30 million to $40 million based on recent comparable transactions in Texas and Virginia markets.
Min 4
Small operators gain competitive advantage because data center site selection requires specialized knowledge of utility infrastructure that traditional industrial brokers don't possess, creating information gaps that favor local players who cultivate relationships with power companies. Institutional investors plan to raise allocations to data centers with 95% of major funds increasing exposure according to CBRE, but these players need entitled land ready for development, not raw industrial sites requiring 12 to 24 months of utility coordination. The Fed's Treasury purchases announced in December 2024 aim to ease short-term stress, yet analysts estimate North America could see $1 trillion in new data center investment between 2025 and 2030 according to industry forecasts. Operators who identify industrial parcels within 5 miles of substations with available capacity and secure options before sellers understand data center demand can control land that hyperscalers like Meta, Amazon, and Oracle desperately need for their expansion plans.
Min 5
The democratization of data center profits comes from understanding that industrial real estate suddenly has dual use cases, with traditional logistics competing against digital infrastructure for the same land. Phoenix Investors' portfolio features numerous sites with access to sufficient electricity, water, and fiber optic networks perfect for data center conversion, proving that smaller operators can play in a space once dominated by specialized REITs. Tech giants leased 40% of hyperscaler data center capacity in the U.S. during 2024, up from 35% in 2023, according to Census Bureau data, and this shift from building to leasing creates sustained demand for third-party facilities that small developers can supply. Nuclear power plants like Susquehanna and Three Mile Island in Pennsylvania recently announced plans to power data centers, setting the stage for large-scale revival of nuclear generation that will unlock previously unviable sites near these facilities. Small operators positioned near legacy power infrastructure that's being upgraded for data center use will capture windfall appreciation as the market reprices industrial land for its highest and best use.
Takeaway
Prologis adding $500 per square foot through warehouse conversions reveals the arbitrage available to any operator who understands power infrastructure and can navigate utility coordination. The 2.8% vacancy rate in primary data center markets combined with $1 trillion in projected North American investment through 2030 creates sustained demand for entitled sites that industrial landlords currently own without recognizing their data center potential. Small operators who secure industrial land near substations with available capacity and begin utility discussions now will control assets that hyperscalers must lease within 18 to 36 months as their existing options exhaust. The window closes as industrial brokers educate themselves on data center site requirements and sellers begin pricing in the conversion premium, probably by late 2026 when enough transactions establish comparable sales data.
