Data Center Investment Boom Sparks Fears of Overheating and Oversupply

Data Center Investment Concerns Amid Market Overheating

Data center investments are drawing increasing attention from major corporations and asset management firms, both domestic and international. However, concerns about potential market overheating are surfacing within the industry. The spotlight on data centers grew during the COVID-19 pandemic, but recent challenges in logistics centers—marked by oversupply and falling revenues—have raised questions about whether data centers might face a similar fate.

Logistics centers have a more predictable demand due to their nationwide necessity, but data center investment remains uncertain despite the surging interest driven by artificial intelligence (AI) needs. Industry experts urge caution, pointing out the difficulty in predicting peak prices and the risks of overinvestment.

Current Investment Landscape

Domestic real estate asset management firms are heavily involved in data center projects. IGIS Asset Management is developing six data centers in the metropolitan area, including Ansan and Goyang, with investments exceeding 4 trillion won. Koramco Asset Management plans to expand its data center investments to 10 trillion won by 2032, developing large centers in Ansan and Uijeongbu and preparing dedicated blind funds and REITs for these assets.

Major corporations are also investing aggressively. SK Group, in partnership with Amazon Web Services (AWS), is building the largest AI-specific data center in Ulsan, targeting a 7 trillion won investment and operations by 2027. LG Uplus, LG Group, and KT are similarly prioritizing data center development as a fresh opportunity amid a sluggish real estate market.

Signs of Potential Overheating

There are parallels with the logistics center market. Logistics centers experienced rising vacancy rates and falling revenue due to oversupply. Currently, data center capitalization rates (Cap Rates) hover around 5%, slightly above Korea's grade A office assets (4.5%) but close to logistics centers (5.5%).

In the late 2010s, overseas investors primarily drove logistics center investments. The surge in non-face-to-face consumption during the pandemic attracted domestic investors, but now metropolitan grade A logistics centers are facing vacancy rates above 20%. Some cold storage warehouses with high vacancies are even being converted to data centers.

A commercial real estate advisor pointed out that as domestic investors entered logistics centers, overseas investors shifted focus to data centers. Now, domestic investors have started launching data center construction projects one after another since last year.

High Costs and Profitability Challenges

Data center construction demands enormous capital. Overseas reports warn of a "bubble" forming, where the cost to build and maintain AI data centers far exceeds their revenue potential. Harris Kuperman, CIO of Praetorian Capital, estimates annual depreciation on AI data centers built this year at around $40 billion (about 56 trillion won), while expected revenues cap at roughly $2 billion (28 trillion won). Frequent replacement of expensive components means revenue must grow more than tenfold to break even.

In Korea, building 1 MW of power capacity costs about 20 billion won. Large data centers with capacity over 40 MW require investments around 800 billion won or more, equivalent to constructing two or three ultra-large office buildings in city centers.

Site Availability and Location Constraints

Securing large land plots in high-demand metropolitan areas is increasingly difficult. Data centers must be near customer companies to reduce latency, making metropolitan locations preferred. However, power supply limits and land shortages in Seoul push new developments toward outer areas like Incheon and Bucheon.

Currently, the southwestern Seoul districts—Gangseo, Guro, Geumcheon, Yangcheon, and Yeongdeungpo—account for 26% of metropolitan data center capacity, but new projects are moving further out due to these constraints.

Industry Outlook

The enthusiasm around AI is driving a rush to secure data center capacity. A commercial real estate advisor noted the prevailing belief that immediate investment is necessary to lock in capacity. Yet, no one can reliably predict the duration or scale of AI demand growth.

If investment continues unchecked, the market risks oversupply, reduced revenue, and increased power demand. This calls for a balanced approach to data center development, weighing growth prospects against potential market saturation.

For professionals involved in real estate and construction, monitoring these trends is critical. Understanding the financial and operational challenges of data centers will help in making informed investment decisions amid a rapidly evolving market.

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