Investment colossus Blackstone Inc. (NYSE: BX) on Dec. 7 announced its establishment of a joint venture (JV) with premier global cloud and carrier-neutral data center, colocation and interconnection provider Digital Realty (NYSE: DLR) to develop four hyperscale data center campuses.
Upon full build-out of all campuses, the data center developments are expected to support nearly 500 megawatts (MW) of total IT load across three Tier 1 metros in Europe and North America.
The four hyperscale data center campuses are located in Frankfurt, Paris and Northern Virginia.
With a total estimated development cost of approximately $7 billion over the next several years, the hyperscale campuses are planned to support the construction of 10 data centers harboring the approximately 500 MW of potential IT load capacity.
Of this capacity, 46 MW is under construction and is 33% pre-leased. The remaining land capacity is reported to be in varying phases of pre-construction, and will be developed to answer customer demand, said the companies.
Approximately 20% of the development's total potential IT load capacity is expected to be delivered through 2025, with the balance expected to be delivered in 2026 and subsequently.
Investors' Rising Confidence In Digital Infrastructure
As another example of the world's largest investors betting big on the data center sector, the Blackstone-Digital Realty JV can only be interpreted as a huge vote of confidence in the future of digital infrastructure.
Financial Times reporting from this past summer of course saw the $70 billion Blackstone Real Estate Income Trust (BREIT) girding itself for the generative AI arms race through a fresh $8 billion investment in QTS, Digital Realty's (erstwhile? ostensible?) competitor who was taken private by Blackstone in one of 2021's more massive data center M&A deals.
And as reported at the time by Telco Titans (UK), during an October quarterly results call, Blackstone's President and Chief Operating Officer, Jonathan Gray, highlighted data centers, led by flagship investment QTS Realty Trust, as a “key area of focus” for Blackstone vis a vis digital infrastructure expansion, staked to the conviction that AI's proliferation will spur significantly more demand in the sector.
Notably per the reporting, QTS was described by Gray as having been the “single largest source of appreciation at the firm, driven by explosive growth in the data creation that is being accelerated by the AI revolution." Blackstone indicated on the call that data center investments make up about 8% of BREIT, added Telco Titans' Richard Agnew.
DLR Flexes On Hyperscale
For its part, Digital Realty appears to have been working up to a deal of the Blackstone JV's magnitude by flexing its hyperscale muscles throughout the year, even just in the U.S.
In July, Digital Realty launched a JV with TPG Real Estate, the real estate investment platform of alternative asset management firm TPG, allowing that firm to acquire an 80% stake in a $1.5 billion portfolio of three hyperscale data centers in Northern Virginia, wherein DLR maintains a minority interest, while continuing to manage day-to-day operations of the assets.
Also in July, Digital Realty announced it had teamed with GI Partners to establish a JV for the sale of a 65% interest in two stabilized hyperscale data center buildings and their associated equipment in the Chicago metro area. Digital Realty also granted GI Partners an option to purchase an interest in the third facility on the same hyperscale data center campus.
Finally in November, Digital Realty announced formation of a development JV with blue-chip REIT Realty Income, in a deal amounting to $200 million spread across a pair of build-to-suit data centers in Northern Virginia, as the investor's first foray in the data center sector.
80-20 Split
Blackstone-affiliated funds led by the investment company's Infrastructure, Real Estate and Tactical Opportunities units were engaged to establish the new JV with Digital Realty.
According to a press release, Blackstone will acquire an 80% ownership interest in the JV for approximately $700 million of initial capital contributions, while Digital Realty will maintain a 20% interest.
“By partnering with Blackstone, the world’s largest alternative asset manager, Digital Realty is better able to deliver capacity to meet the burgeoning demand of our hyperscale customers, by accessing a deep pool of like-minded private capital,” said Andy Power, President and Chief Executive Officer of Digital Realty.
Power added, “Digital Realty is focused on executing on the sizable opportunity that lies ahead and this partnership helps to accelerate the monetization of nearly 20% of our industry-leading land bank.”
Subsequent to closing, the JV parties will fund their pro rata share of the remaining development costs. Digital Realty will manage the development and day-to-day operations of the joint venture, for which it will receive customary fees.
Greg Wright, Chief Investment Officer of Digital Realty, commented, “Partnering with Blackstone marks the culmination of a record year of capital recycling, and aptly reflects the shift in our funding strategy, to diversify our sources of capital and bolster our balance sheet in order to capitalize on the significant opportunity that lies ahead.”
The joint venture is scheduled to close in two stages over the course of the first half of 2024, subject to certain regulatory and other approvals, as well as other customary closing conditions.
“Blackstone’s deep pools of capital and extensive sector experience position us to capitalize on the explosive growth in data," asserted Greg Blank, Senior Managing Director at Blackstone Infrastructure. Mike Forman, Managing Director at Blackstone Real Estate, added, "We look forward to partnering with Digital Realty to develop high-quality data centers in top markets around the world.”
Latham & Watkins is serving as Digital Realty’s legal counsel in the transaction; Simpson Thacher & Bartlett LLP is acting as Blackstone’s legal counsel. (How excited is Blackstone over the deal? They rushed out this nifty Youtube short to commemorate it.)
Jon Gray, President and COO of Blackstone, concluded, “Data centers are experiencing once-in-a-generation demand growth, driven by cloud adoption and the AI revolution. Digital infrastructure is one of our highest conviction investment themes as a firm, and this transaction with a trusted data center operator in Digital Realty is another example of how we are investing behind this trend.”
