Data centers are a great example of how real estate moves with the economy, according to Marcus & Millichap CEO Hessam Nadji on a CNBC appearance.
“This is a real estate accommodation of a wave of technology that is now morphing from the cloud and server farms of a few years ago to AI,” said Nadji. “Only 20% of the current capacity is AI oriented, and just think about how much AI is going to grow.”
The data center market has doubled in the past four years and is attracting long-term leases from companies that need them. These highly specialized facilities are attractive to developers where they can access sufficient power and get local municipality approvals to support construction.
Although data centers are an interesting asset at the moment, they will not have a large influence on evaluations and the price of commercial real estate at a macro level for now, Nadji said. There are only 6,000 data center properties across the United States today.
“Even if you double, triple or quadruple that, it's not going to become a major part of the macro commercial real estate market or impact the economy, but it is a niche play that can't be ignored,” said Nadji.
Switching the focus to retail, Nadji said the mall sector is all about the few that are going to survive, with the majority having been pushed into obsolescence.
“The strength of retail is in neighborhood, community centers, open air centers that have entertainment to generate foot traffic,” said Nadji. “The fact that a lot of people are working at home means they're getting out of the house to go to the coffee shop, which creates retail traffic, and restaurant and bar sales are nearing record levels.”
Nadji reiterated his sentiment that the CRE market is on the verge of a turning point, with investors shifting from fear of uncertainty to the fear of missing out. The completion of the 2024 presidential election as well as the Fed’s moves to lower interest rates have brought clarity to the market.
“We're seeing a lot more buyers at the table,” he said.