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AI drives soaring demand for data centers; Healthcare Realty, KKR form JV

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Investment Banking Essentials May 15

AI drives soaring demand for data centers; Healthcare Realty, KKR form JV

S&P Global Market Intelligence offers our top picks of real estate news stories published throughout the week.

Data centers are emerging as the "hottest asset class" as demand soars driven by US corporates embracing artificial intelligence, Bloomberg News reported, citing Jones Lang LaSalle Inc. CEO Christian Ulbrich.

Indeed, real estate investment trusts focused on data centers such as Digital Realty Trust Inc., have seen acceleration in leasing activity driven by AI.

"Digital Realty experienced accelerating momentum in the first quarter of 2024, headlined by a collection of multifaceted AI opportunities that drove a number of new leasing records as demand for our capacity in core markets remains elevated," President, CEO and Director Andrew Power said during the REIT's first-quarter earnings call.

The company's total bookings for the first quarter totaled $252 million, "well ahead" of the company's prior quarterly record of $176 million, Power said.

"A year ago, data center demand was strong, driven by the growth of cloud and digital transformation while supply was tightening in power transmission constraints, supply chain delays and other factors. Since then, AI has become a significant driver of demand as hyperscalers race to develop, deploy and implement the technology while enterprise begins to explore the potential of this wave of technological evolution," Power added.

CHART OF THE WEEK: 19 US REITs expected to raise Q2 dividends

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⮞ Nineteen US-based public real estate investment trusts are expected to raise dividends in the second quarter, according to S&P Global Market Intelligence forecasts.

⮞ Global Net Lease is so far the only REIT included in the analysis that has announced a lower quarterly payout.

⮞ Over 85% of the US REIT industry is expected to maintain their regular cash dividends during the second quarter.

Top transactions

– Healthcare Realty Trust Inc. signed a joint venture agreement with KKR & Co. Inc. to invest in medical outpatient buildings. The REIT will contribute 12 of its existing properties valued at $382.5 million to seed the venture. KKR will make an equity contribution equal to 80% of the value of the properties and committed up to $600 million to pursue additional acquisitions. The seed portfolio comprises 762,399 square feet with 98% occupancy.

Eastdil Secured LLC and BlackBirch Capital was Healthcare Realty's financial advisers. Latham & Watkins LLP served as legal adviser. Newmark served as financial adviser and Simpson Thacher & Barlett LLP served as legal adviser to KKR.

– Sunstone Hotel Investors Inc. completed the acquisition of Hyatt Regency San Antonio Riverwalk Hotel for $230.0 million from Hyatt Hotels Corp. Affiliates of the seller will continue to manage the 630-room property. Sunstone funded the deal with available cash.

Pacific Urban bought two multifamily communities in Colorado and Georgia for a combined $219.5 million, Multi-Housing News reported. The buyer paid $117 million for the 420-unit Viridian community in Greenwood Village, Colo., and $102.5 million for the 412-unit Mount Vernon Flats at the Perimeter property in Atlanta.

– Braemar Hotels & Resorts Inc. subsidiaries CHH Torrey Pines Hotel Partners LP and CHH Torrey Pines Tenant Corp. agreed to sell the Hilton-La Jolla Torrey Pines hotel in La Jolla, Calif., for $165 million in cash to JRK Torrey Pines Hotel Owner LLC. The price is subject to customary pro-rations and adjustments. The sale is expected to close in the second quarter of 2024, subject to customary closing conditions.

US hotel performance

The average daily rate (ADR) and revenue per available (RevPAR) room of US hotels climbed during the week ended May 4, STR reported, citing data from CoStar, which provides information and analytics on property markets.

ADR was $159.97, up 1.3% from the comparable week in 2023. RevPAR was 0.5% higher at $103.09. Occupancy fell 0.8% to 64.4% during the period.

Among the top 25 markets, Seattle reported the highest year-over-year increase in occupancy, at 69.4%. Dallas recorded the highest increase in ADR, up 5.8% year over year to $134.33.

Click here to see key people moves in North America real estate.

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US housing market: US home prices continued upward trend in February