If you’re in the commercial real estate business, this probably isn’t a good time to own a brick-and-mortar mall. Amidst a “retail meltdown,” wrote Derek Thompson in The Atlantic in April, the 1,200 malls in operation today may shrink to 900 within a decade.
A better real-estate bet, writes Esther Fung in The Wall Street Journal, might be a data center or cell tower. “As more people consume digital content and make purchases online, landlords and owners of data centers and cell towers that house cables and beam data to smartphones are looking to expand faster,” she writes. Those online purchases that eat up data-center and cell capacity are one of three factors contributing to the demise of malls, according to Thompson.*
Fung elaborates: “While mall owners face growing pressure from the rise of e-commerce, for example, the increase in web activity is fueling demand for wireless infrastructure and racks of telecommunication equipment that need to be stored somewhere.”
She writes that total returns for data-center and cellular infrastructure real estate were 22% over the first half of the year, vs. an 8.8% return for the S&P 500 stock index.
One concern is whether advancing technology might over time shrink the amount of real estate required for the same functionality and whether today’s power-hungry data centers might become obsolete. Fung quotes Joel Beam, managing director and senior portfolio manager of real-estate strategies at asset-management firm Salient Partners LP, as saying, “You wonder if all this stuff could eventually be stored on the head of a pin. I’m not a tech expert.” But Laurel Durkay, associate portfolio manager of real-estate securities at asset manager Cohen & Steers, notes that exponential data growth has more than offset increasing efficiencies.
Fung concludes by quoting Andrew Power, chief financial officer of Digital Realty, as saying, “You’re not going to see a world where a data center will be replaced by an iPhone.”
*Thompson in his April article in The Atlantic reported that in addition to pressure from online shopping, America simply built too many malls, building 10 times more shopping space per capita than Germany. In addition, he said, consumers have shifted their spending from clothes toward traveling and dining out.