Data Center REITs Poised to Benefit from Construction Hurdles, Mizuho Says

Regulatory hurdles and growing community opposition to new data center construction are creating higher barriers to entry in the sector, a trend that could benefit established real estate investment trusts (REITs), according to an analysis from Mizuho.

Analyst View

Mizuho reiterated its Outperform ratings for data center giants Equinix (NASDAQ:EQIX) and Digital Realty (NYSE:DLR). The firm maintained a price target of $1,275 for Equinix and $223 for Digital Realty, representing potential upsides of 22% and 20%, respectively, from current trading levels.

The firm's preliminary analysis suggests that while these development challenges pose a risk to future projects, they may strengthen the market position of incumbent operators. Mizuho noted that projects already under construction likely have the necessary entitlements and grid connections secured, though undeveloped "land banks" held for future expansion could face some risk.

Rising Local Opposition

State and municipal-level pushback against data center development is on the rise, driven by several key community concerns. According to Mizuho, these include:

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• High electricity and water consumption required for operations and cooling.
• Worries that grid strain will increase electricity costs for local households.
• Environmental impacts such as noise from cooling fans and backup generators.
• The contrast between a high number of temporary construction jobs and relatively few permanent operational roles.

Regulatory Landscape

This opposition has led to a variety of restrictive actions, from outright moratoriums to stricter approval requirements. Mizuho reports that while most of these measures are at the metropolitan or municipal level, the trend is growing.

Currently, New York is the only state with a full statewide moratorium on new data centers. However, Mizuho notes that nine states have moratoriums pending, and more than 20 states have some form of restrictive legislation either approved or under consideration. States in focus include New York, Pennsylvania, Texas, Illinois, and Ohio.