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How to Underwrite a Data Center: The Mechanics Office Never Taught You
Learning how to underwrite a data center means unlearning office. Office is priced per square foot, leased for five to ten years, and exposed to tenants who shrink their footprint at renewal. A data center is priced per kilowatt of critical IT load, leased for ten to fifteen years or more to credit tenants, and constrained by electricity rather than by demand. CBRE reported primary-market vacancy at a record-low 1.4 percent in the first half of 2026, down from 1.6 percent a year earlier, with record lows in Northern Virginia at 0.3 percent and Atlanta at 1 percent. The asset that replaced office in institutional portfolios shares almost none of its underwriting.
Key Takeaways
A data center is underwritten in megawatts of critical IT load, not square feet, because power and cooling are the scarce inputs and floor area is not.
CBRE reported primary-market vacancy at 1.4 percent in the first half of 2026 while primary-market supply rose 33.7 percent year over year to a record 10,903 megawatts. Supply is being absorbed as fast as it is built.
JLL forecasts average global shell-and-core construction at 11.3 million dollars per megawatt in 2026, up 6 percent from 10.7 million dollars in 2025. Cushman and Wakefield reported per-megawatt costs up 21 percent since the fourth quarter of 2024.
Leases are typically triple net or modified gross, with the committed term stated in kilowatts of critical load and metered power passed through to the tenant.
The residual risk is obsolescence, not vacancy. A hall designed for low rack density can be functionally unusable for high-density workloads long before the building wears out.
How to Underwrite a Data Center: What Is the Order of Operations?
Underwriting a data center runs in a fixed order: confirm the power, then the lease, then the credit, then the cost to build, then the residual. Power comes first because nothing downstream matters without it. A site without an executed interconnection agreement and a delivery date is a land deal wearing a data center label.
The sequence inverts office practice. In office, the tenant is the risk and the building is the given. Here the building is the risk and the tenant is close to a given, because hyperscale demand exceeds deliverable supply. CBRE reported primary-market net absorption up 11.7 percent year over year to 1,456.2 megawatts in the first half of 2026 even as supply hit a record. The underwriting question is not whether someone will lease it. It is whether it can be built, energized, and still be technically relevant when the first lease rolls.
Why Is a Data Center Priced in Megawatts, and What Does Power Cost?
Data centers are priced per kilowatt of critical IT load per month because power, not floor area, is what the tenant is buying. Two buildings of identical square footage can differ by an order of magnitude in value if one has grid capacity and the other does not. The unit of pricing tells you the unit of scarcity.
CBRE reported that average asking rates for 250-to-500-kilowatt requirements across primary markets rose 4.3 percent in the first half of 2026, roughly double the 2.5 percent increase in the same period of 2025, with rates for that requirement expected above 215 dollars per kilowatt per month. Larger deployments moved faster still: rates for 3-to-10-megawatt requirements rose 8.3 percent. Note the direction of the per-kilowatt curve, because it matters for modeling. Small retail colocation requirements price at a premium per kilowatt, and large hyperscale blocks price below the quoted 250-to-500-kilowatt rate. Applying a colocation rate to a hyperscale block is the fastest way to overstate revenue by a wide margin.
On the cost side, JLL forecasts average global shell-and-core construction at 11.3 million dollars per megawatt in 2026, up 6 percent from 10.7 million dollars in 2025, and Cushman and Wakefield's 2026 development cost guide reported per-megawatt costs up 21 percent since the fourth quarter of 2024. Fitting a shell out to a fully powered, cooled, turnkey hall adds materially on top of that, and all-in North American greenfield figures for the most modern facilities run well above the shell number.
How Does a Data Center Lease Work and Who Pays for Power?
Data center leases are typically triple net or modified gross, and the committed unit is kilowatts of critical IT load rather than square feet. Base rent buys reserved power capacity. Metered power consumption is passed through to the tenant separately, so the landlord's exposure is not the electricity bill itself but the efficiency of the facility delivering it.
Lease element | Office convention | Data center convention |
|---|---|---|
Committed unit | Rentable square feet | Kilowatts of critical IT load |
Typical term | 5 to 10 years | 10 to 15 years and up |
Structure | Gross or base year | Triple net or modified gross |
Power | Landlord expense, recovered in opex | Metered and passed through to tenant |
Escalators | Negotiated, often flat | Fixed annual percentage, standard |
Primary risk | Rollover and downsizing | Delivery, then obsolescence |
The Commercial Real Estate Finance Council's data center primer and law firm commentary from Hogan Lovells both describe the same split: base rent for reserved capacity, with power reimbursed on a metered basis, and increasingly with efficiency provisions attached. Modern hyperscale lease forms often include a power usage effectiveness cap, which allocates the cost of running a facility less efficiently than promised back to the landlord.
That clause is where an underwriter earns their fee. Size it. On a 6-megawatt critical IT load at 8,760 hours a year and an 8-cent blended power cost, each 0.1 of power usage effectiveness above the contractual cap costs the landlord 6,000 kilowatts times 0.1 times 8,760 hours times 0.08 dollars, or 420,480 dollars a year. A facility running at 1.45 against a 1.30 cap gives back roughly 630,000 dollars annually, which is real money against the return and is invisible to anyone modeling the lease as a simple triple net.
How Do You Underwrite Tenant Credit and Obsolescence Risk?
Tenant credit in a data center is usually strong and usually concentrated, which is a different problem from weak credit. A single investment-grade hyperscale tenant on a fifteen-year lease produces bond-like cash flow and single-name concentration at the same time. Underwrite the covenant, the guarantor entity, and the renewal probability, not the parent's brand.
The harder risk is technical obsolescence, and it has no analogue in office. Rack density requirements have climbed sharply with accelerated computing, and halls engineered for conventional air-cooled densities can be functionally unsuitable for high-density workloads that require liquid cooling and reinforced floor loading. The building does not wear out. It becomes the wrong shape. That is a residual value question, and it should be priced into the exit assumption rather than assumed away, in the same way replacement cost sets a floor in other property types.
Work the full example with labeled assumptions. Take a 6-megawatt critical IT load development. Assume contract rent of 135 dollars per kilowatt per month, stated as an assumption for this example rather than a market quote, since large blocks price below the CBRE 250-to-500-kilowatt rate. Annual base rent is 6,000 kilowatts times 135 dollars times 12, or 9,720,000 dollars. Assume non-reimbursed management and structural reserve at 4 percent of revenue, 388,800 dollars, giving 9,331,200 dollars of NOI. Assume all-in development cost of 17.6 million dollars per megawatt, or 105,600,000 dollars. Yield on cost is 9,331,200 divided by 105,600,000, or 8.8 percent. At an assumed 6.5 percent stabilized cap rate, value is 143,556,923 dollars, a development spread of roughly 234 basis points and 37,956,923 dollars of value created.
Now stress it. Add the 630,000 dollar annual power usage effectiveness leakage from the section above and NOI falls to 8,701,200 dollars, yield on cost drops to 8.2 percent, and value at the same cap rate falls to 133,864,615 dollars. One efficiency clause moved value by 9.7 million dollars. That is the difference between underwriting a data center and underwriting a building with servers in it, and it is the same yield on cost versus market cap rate discipline applied to a power-constrained asset.
Frequently Asked Questions
How do you underwrite a data center deal?
Confirm power first: interconnection agreement, capacity, and energization date. Then model the lease in kilowatts of critical IT load with metered power passed through. Then underwrite tenant covenant and concentration. Then apply a per-megawatt development cost. Then price residual obsolescence into the exit assumption.
What metrics matter most in data center underwriting?
Critical IT load in megawatts, rent per kilowatt per month, power usage effectiveness against any contractual cap, all-in cost per megawatt, weighted average lease term, and yield on cost. Square footage and rent per square foot are close to irrelevant.
Who pays for power in a data center lease?
The tenant, in most structures. Base rent buys reserved capacity and metered consumption is passed through separately. The landlord retains exposure through efficiency, because a power usage effectiveness cap allocates the cost of overhead above the contracted ratio back to the landlord.
What is the biggest risk in a data center investment?
Delivery risk during construction, then obsolescence at the residual. Grid interconnection, equipment lead times, and energization schedules drive the first. Rack density and cooling requirements drive the second, because a hall built for the wrong density profile loses value long before the structure does.
Conclusion
Data centers inherited office's place in institutional portfolios and none of its underwriting. Office is a square-footage business exposed to tenant rollover in a market where quality space is abundant and durable demand is scarce. A data center is a power business exposed to construction, grid access, and technical relevance, in a market where demand exceeds what can be delivered and vacancy sits at 1.4 percent.
The operator who ports office instincts into this asset will misread it at every line: pricing the wrong unit, ignoring the efficiency clause, and sizing debt against a cash flow whose residual depends on a rack density spec nobody in the deal has read. Start from power. Megawatts are the product, the long-dated lease is the cash flow, and delivery and obsolescence are the risks worth pricing.