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Evaluate a data center as two inseparable assets: mission-critical infrastructure and income-producing real estate. The investment is defensible only when you can prove that contracted megawatts will be physically energized on schedule, tenants can pay through the lease term, the lease allocates operating and capital risks fairly, and the location can support connectivity, permits, labor, water and expansion. A marketed power figure, a letter of intent or a high headline rent is not enough.

Start with four investment gates

Before building a detailed model, require four gates to pass. Failing any one usually makes the other assumptions unreliable.

  1. Power gate: Utility and interconnection documents must support the megawatts you are underwriting, the redundancy level, the upgrade scope and a credible energization date.
  2. Tenant gate: Revenue must come from signed, enforceable commitments with credit support, not from an uncontracted pipeline or informal demand indications.
  3. Lease gate: Rent, escalators, pass-throughs, options, maintenance and capital obligations must leave the owner with an acceptable risk-adjusted margin after required infrastructure spending.
  4. Location gate: Fiber, latency, permitting, taxes, labor, hazards, water and customer access must support the operating plan at a total cost that remains competitive when power is delayed or more expensive.

Use a common underwriting date, document every assumption, and assign an owner to each item of evidence. A data room should distinguish executed contracts from proposals, estimates and management representations.

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Prove power before valuing capacity

Power is the primary production input for a data center. Treat every megawatt claim as a question—what can be energized, where, when and under what conditions—rather than as an asset attribute.

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Separate four different power numbers

  • Marketed capacity: A broker, developer or seller may advertise a site as having a certain number of megawatts. This can reflect a long-term aspiration rather than a utility commitment.
  • Contracted capacity: The amount stated in an executed utility, service or interconnection agreement, including conditions and milestones.
  • Physically deliverable capacity: The load the transmission and distribution system, substations, transformers and on-site equipment can actually serve at the required reliability level.
  • Energized capacity: The portion that can be placed into service by a specific date after permits, construction, testing and utility acceptance.

Value the project on the last category for the period in which tenants are expected to pay. Show the other categories separately so a future expansion does not get mistaken for current income-producing capacity.

Documents and confirmations to obtain

Evidence What to verify Why it changes value
Utility service agreement Contracted load, voltage, delivery point, term, conditions and termination rights Defines whether the utility is obligated to serve the stated load
Interconnection study and queue record Queue position, study status, network upgrades, cost responsibility and required milestones Unfunded or unapproved upgrades can move the energization date or destroy project economics
Substation and transformer plan Equipment ratings, procurement lead times, ownership, redundancy and commissioning sequence A utility allocation is not usable until the physical path to the building is complete
Construction and permitting schedule Critical-path permits, equipment delivery, testing and utility witness dates Revenue starts when capacity is accepted and usable, not when construction begins
Outage and reliability history Historical interruptions, restoration times, planned maintenance and feeder diversity Downtime can trigger service credits, tenant claims and reputational damage
Expansion plan Incremental megawatts, additional upgrades, cost, lead time and site constraints Expansion value should be discounted for both timing and funding risk

Build an energization schedule, not a single date

Model each phase with a target date, a downside date and the dependency that could move it. Include interconnection approval, long-lead transformers and switchgear, civil works, permits, commissioning, utility testing and tenant fit-out. Convert every month of delay into lost rent, carrying cost, interest and any liquidated damages. If the utility has not committed to a date, label the date as an assumption and apply a probability-weighted delay rather than treating it as certain.

Test reliability and operating-cost exposure

Underwrite the promised redundancy—such as diverse feeders, backup generation, fuel storage and uninterruptible power systems—against the tenant’s service-level requirements. Review generator permits, emissions limits, fuel contracts and maintenance records. Model higher energy prices, demand charges, curtailment, outage events and the cost of running backup systems. A site with nominally cheap power can be less valuable if it has weak reliability or expensive upgrades.

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Power availability and infrastructure delivery timelines were the most decisive factors shaping site selection, leasing activity and pricing in the first half of 2025, according to CBRE. Its 2024 global trends report also said worldwide power shortages were inhibiting growth and that sourcing power was a top priority across regions. Those findings support placing deliverable, timely power ahead of a prestigious address.

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Underwrite tenants as contracts and operating dependencies

Tenant demand becomes investment value only when it is enforceable, financeable and technically compatible with the facility. Review each tenant separately before calculating a portfolio average.

Credit and support

  • Identify the exact legal tenant, its ultimate parent, guarantors and any keepwell or letter-of-credit support.
  • Review audited financial statements, debt maturities, liquidity, rating information where available and material litigation.
  • Determine whether rent is paid by the operating subsidiary or a stronger parent, and whether a change in control releases or weakens the guarantee.
  • Check security deposits, letters of credit, prepayment and landlord remedies against the likely cost of re-leasing specialized space.

Revenue and concentration

Calculate each tenant’s share of contracted rent, power demand and gross margin. A facility whose largest customer represents most of the rent should be valued differently from a diversified campus, even if total megawatts are identical. Stress-test the loss or downsizing of the largest tenant, the time to secure a replacement, rent-free periods, retrofit work and broker commissions. Include a scenario in which the tenant remains solvent but delays its move-in and pays only after acceptance.

Separate commitment levels

Demand status How to treat it in the base case Required proof
Executed lease or binding capacity contract Include according to contractual commencement, conditions and credit support Signed agreement, exhibits, security and evidence that conditions precedent are satisfied
Signed letter of intent Do not count as contracted rent; use only in an explicitly labeled upside case Term sheet, exclusivity, expiration date and history of conversion to leases
Pipeline or verbal demand Exclude from value until probability and timing are supported by comparable transactions Named prospect, technical requirements, stage, budget and decision date
Speculative capacity Value after lease-up costs, downtime and fit-out, using a conservative absorption period Market evidence for achievable rent and tenant improvements

CBRE reported that 74.3% of under-construction capacity in the first half of 2025 was already preleased. That market statistic does not make an individual project safe; it demonstrates why delivery timing and tenant commitments must be modeled together. A prelease that begins only after energization still leaves the owner exposed to schedule slippage and construction acceptance risk.

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Check technical fit and switching costs

Confirm the tenant’s rack density, cooling method, voltage, network design, security requirements, commissioning sequence and growth profile. High switching costs can support renewal, but they can also make a failed fit-out expensive to cure. Require a plan for equipment removal, data destruction, restoration and reconfiguration if the tenant exits.

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Read the lease as a risk-allocation document

The rent line is only one part of a data-center lease. Extract every provision that can change cash flow, capital needs or the owner’s ability to re-lease the facility.

Lease item Questions to answer
Remaining term When does contractual rent end, and are commencement or acceptance conditions still open?
Renewal options Who controls the option, how is rent reset, and can the tenant renew only part of the capacity?
Termination rights Can the tenant terminate for convenience, power delay, service failure, casualty or regulatory change?
Escalators Are increases fixed, indexed, capped or subject to a reset? Do they apply to all rent components?
Pass-throughs Which utility, tax, insurance and operating costs are recoverable, and are there caps or exclusions?
Security What deposit, letter of credit, parent guarantee and replenishment obligations remain after a draw?
Expansion and contraction Are additional suites or megawatts reserved, and can the tenant return capacity without paying stranded costs?
Repairs and maintenance Who maintains generators, chillers, electrical gear, roofs, security systems and controls?
Capital expenditures Who funds replacement equipment, code upgrades, efficiency projects and tenant-specific improvements?
Restoration What must be removed or rebuilt at expiry, and is the security adequate for that obligation?
Default remedies What cure periods, service suspension rights, accelerated rent and damages are available?
Assignment and change of control Can the tenant transfer to a weaker credit, and can the owner sell the building without consent?

Map each obligation to the facility plan. For example, a tenant option for 20 additional megawatts should identify the utility reservation, substation work, equipment procurement, funding source and deadline. If the owner must build that capacity without a firm rent obligation, model the cost as a contingent investment rather than as secured growth.

Measure lease quality with operating metrics

  • Weighted average lease term: Weight each lease by rent or capacity, and show the expiry schedule by year.
  • Contractual rent growth: Separate fixed escalators from variable pass-throughs so inflation protection is not overstated.
  • Tenant-recovery ratio: Compare recoverable operating and capital costs with total costs under realistic utility and maintenance assumptions.
  • Expiry concentration: Identify the percentage of rent and megawatts that expire in the same 12- or 24-month period.
  • Unfunded obligation: Quantify owner-funded fit-out, expansion, restoration and replacement capital that is not reimbursed.

Compare locations on total deliverable cost

Location is not a simple ranking of major markets. A power-ready site in a secondary or tertiary market can outperform a constrained primary market if it delivers capacity sooner at an acceptable total cost and still meets the customer’s network requirements.

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Location factor Questions for diligence Effect on the investment
Fiber and carrier diversity How many independent routes and carriers reach the site? Are entry points physically separated? More diversity reduces outage concentration and supports higher-value workloads
Latency and customer access What is the measured latency to target metros, cloud regions, exchanges and enterprise customers? Some workloads require proximity; others can trade distance for faster power delivery
Utility environment What is the queue length, upgrade policy, tariff structure, renewable availability and curtailment risk? Determines timing, energy cost and expansion certainty
Permitting and zoning Are data centers, generators, cooling systems and substations permitted? How long do hearings and approvals take? Political or zoning delay can erase an apparent land discount
Taxes and incentives What property, sales, use, utility and income taxes apply? Are incentives statutory, conditional or expiring? Changes recurring operating cost and residual value
Labor and contractors Can the market supply operators, electricians, controls specialists and construction labor? Scarcity raises build cost, ramp time and outage-response risk
Climate and hazards Assess flood, wildfire, storm, heat, seismic, winter and smoke exposure, plus insurance availability. Changes resilience capex, premiums, deductibles and business-interruption exposure
Water What cooling design, water rights, drought restrictions and discharge permits apply? Can limit density, expansion or operating hours in stressed basins
Generation and fuel How close are substations, generation, pipeline or delivered fuel? What permits govern backup operation? Affects redundancy cost and the ability to operate during grid events

Score locations only after converting these factors into dollars and schedule risk. Include land, utility upgrades, taxes, incentives, fiber construction, water infrastructure, labor premiums, insurance, resilience work and expected lease-up time. A cheaper parcel is not cheaper if it adds two years before rent begins.

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Build the financial model and valuation

Model the operating stack

Start with contracted base rent and separately model power, cooling, connectivity and other pass-throughs. Deduct utility purchases, demand charges, maintenance, staffing, security, insurance, property taxes, management, reserves and owner-funded capital expenditure. Show tenant improvements, commissions, financing fees and construction-period interest below operating income so development and stabilized returns are not confused.

Use a monthly model during construction, energization and lease-up, then annual periods after stabilization. Tie revenue commencement to lease conditions and usable capacity. Track megawatts, occupancy, rack density and rent per kilowatt as separate drivers; a rent increase that requires disproportionate power or capital may reduce equity returns.

Use several value lenses

  • Discounted cash flow: Discount project cash flows using assumptions that reflect power, tenant and location risk. Include a terminal value based on stabilized cash flow and a realistic exit yield.
  • Income capitalization: Apply a market yield only to sustainable, risk-adjusted net operating income. Do not capitalize temporary pass-throughs or uncontracted pipeline.
  • Replacement and development cost: Compare land, utility upgrades, building, electrical and cooling costs with the value of an operating asset. This is a cross-check, not a substitute for tenant cash flow.
  • Unit metrics: Analyze value per deliverable megawatt, per energized megawatt, per critical-load kilowatt and per usable square foot. State whether the denominator is contracted, built or merely planned.

Interpret reported yield ranges carefully

Knight Frank reported prime yields of 4.5%–5.5% in core markets, 6%–8% in secondary markets and 8%–12% in emerging markets in 2025. These are reported market ranges, not a valuation rule for an individual asset. Lease structure, power availability and sustainability credentials were identified as factors affecting yields. A shorter lease, concentrated tenant base or uncertain power should generally require a risk adjustment rather than an automatic selection of the midpoint.

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Calculate downside value per energized unit

For each scenario, divide value by megawatts that are physically energized in that scenario—not by the advertised campus total. This prevents a project with delayed expansion from appearing cheaper simply because speculative capacity remains in the denominator. Also calculate equity multiple, internal rate of return, debt-service coverage and the amount of additional capital required before stabilization.

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Use current market evidence without treating it as a forecast

Indicator Reported figure How to use it
Under-construction capacity in primary North American markets, H1 2025 5,242.5 MW Context for construction activity and competitive supply; not a forecast of your market’s absorption
Increase in that capacity versus H2 2023 61.5% Shows the scale-up of building activity over the comparison period
Under-construction capacity already preleased, H1 2025 74.3% Supports modeling tenant commitments and delivery dates together
10 MW-plus pricing increase in Northern Virginia since year-end 2024 13.8% Market observation for that segment and period; not an asset-level appreciation assumption
10 MW-plus pricing increase in Silicon Valley since year-end 2024 19% Market observation for that segment and period; test whether local power constraints support continuation
10 MW-plus pricing increase in Chicago since year-end 2024 15.4% Market observation for that segment and period; do not apply outside comparable assets
Investors citing regulation and power availability as the top concern, 2025 survey 39% Signals the risks investors are watching; it is not a probability of delay
Investors naming hyperscale build-to-suit as the leading opportunity for the next 12–24 months 49% Indicates preference in that survey period; underwrite the specific tenant and contract

CBRE vice chair Rob Faktorow said: “Rental rates continued to climb across all requirement sizes as the rise of artificial intelligence (AI) workloads is transforming the data center industry, driving unprecedented demand for power-intensive infrastructure.” Rising demand can improve leasing prospects, but it does not remove execution, credit or power-delivery risk.

Run integrated downside cases

Do not stress one variable at a time only. Data-center risks interact: a power delay can postpone tenant rent, increase construction interest and cause a tenant to exercise a termination right simultaneously.

Scenario Model changes Decision signal
Delayed energization Move service commencement by 6, 12 and 24 months; add carrying costs and lost rent Shows the latest date at which the project still covers debt and required return
Interconnection overrun Increase upgrade cost and owner funding; delay expansion while preserving base load Tests whether equity can fund the utility’s final scope
Construction-cost escalation Raise electrical, cooling, labor and financing costs; reduce contingency Identifies the minimum rent or capital contribution needed to proceed
Tenant default Remove the largest tenant’s rent, apply security, add downtime, retrofit and re-leasing costs Measures concentration and recovery value
Tenant downsizing Return a portion of capacity, preserve fixed costs and charge contractual termination amounts where enforceable Tests stranded power and fit-out exposure
Slower lease-up Extend absorption, increase concessions and defer incremental capital Shows whether speculative capacity is affordable
Higher power prices Raise energy and demand charges; apply pass-through caps and collection assumptions Reveals margin compression and competitiveness risk
Outage or disaster Apply downtime, service credits, repair, replacement, insurance deductibles and business interruption Tests whether redundancy and insurance match lease promises
Lease-expiry concentration Reduce renewal probability and staggered re-leasing assumptions in the concentrated expiry year Shows terminal and refinancing risk

After each case, revalue the asset and identify which assumption breaks the investment thesis first. A project that survives a moderate delay but fails when the largest tenant downsizes may need a different security package, not merely a lower purchase price.

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Follow a practical diligence sequence

  1. Define the investment perimeter. List the land, buildings, substations, generation, interconnection rights, leases, service contracts and expansion options included in the purchase.
  2. Create a capacity ledger. For every megawatt, record its source, legal status, physical path, energization date, redundancy and cost to deliver.
  3. Reconcile the tenant schedule. Tie each lease’s rent, power, commencement condition, expiry, options and security to the capacity ledger.
  4. Review technical and environmental reports. Confirm equipment condition, cooling, structural loading, water, fuel, emissions, flood, wildfire and other hazard assumptions.
  5. Build the base case. Use only enforceable commitments for contracted revenue and explicitly label speculative lease-up.
  6. Price location risk. Obtain carrier, latency, utility, tax, labor, permitting, insurance and water evidence for each candidate site.
  7. Run integrated scenarios. Stress timing, cost, credit, operations and market assumptions together and calculate value per energized megawatt.
  8. Set investment conditions. Make closing contingent on utility confirmations, permits, tenant estoppels, required consents, insurance and funding for identified upgrades.
  9. Monitor after closing. Track queue milestones, equipment delivery, commissioning, tenant acceptance, covenant compliance, outages and lease expiries against the model monthly.

Red flags that warrant a pause

  • The seller quotes a large power number but cannot provide a utility agreement, queue record or upgrade scope.
  • The energization date depends on an unsigned study, an unpermitted substation or equipment with no procurement slot.
  • A tenant’s letter of intent is included in “contracted” occupancy, or a parent guarantee is described but not executed.
  • The lease grants expansion or contraction rights without funding, notice periods or payment for stranded infrastructure.
  • Pass-through language excludes the very utility, maintenance or capital costs that drive the facility’s economics.
  • One tenant supplies most rent and power demand, while security is too small to cover specialized re-leasing costs.
  • The model uses a market yield or price-per-megawatt benchmark without adjusting for lease term, redundancy, power timing, hazards or capex.
  • Water, generator emissions, zoning or tax incentives are treated as permanent despite permits or statutes that can expire.
  • Expansion megawatts are counted in value even though the utility has not committed to a date or cost.

Make the investment decision

Proceed only when the base case is supported by deliverable power, enforceable tenant cash flow and a lease that allocates technical and capital obligations clearly. Require enough liquidity and contingency to survive the first material downside case, and set a walk-away price that reflects the value of energized rather than advertised capacity. When power is constrained, a secondary location with verified delivery, reliable fiber and acceptable customer latency can be superior to a famous market that cannot energize the building on the required schedule.

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