Data Center Bytes

As experienced investors in Japanese real estate know, the Tokutei Mokuteki Kaisha (TMK) is the Japanese entity used by most investors to acquire and hold large real estate assets due to its favorable tax treatment. It is also well known that the TMK is a highly regulated entity, and the laws and regulations governing the TMK are rife with traps for the unwary. For investors in Japanese data centers who use the TMK as their investment vehicle, a couple of these traps arise because of the high value of the TMK’s movable assets (i.e., the data center fit out) in relation to its immovable assets (i.e., the land and the core and shell of the data center).

The UK government published on April 1 a policy statement setting out its proposals for the much-anticipated Cyber Security and Resilience Bill (the Bill). The proposals include bringing data centers and managed service providers within scope of the United Kingdom’s cybersecurity regulatory framework, strengthening supply chain obligations for designated operators of essential services, updating technical security standards, and new executive powers for the UK government to direct regulated entities in relation to a specific cyber incident or threat.

The demand for data centers is continuing to accelerate, fueled largely by generative artificial intelligence, broader digital transformation, and organizations migrating to cloud infrastructure. To help navigate key challenges for meeting demand, from a vendor’s perspective, Morgan Lewis partners Barbara Melby and Mike Pierides and associate James Mulligan recently authored an Insight titled Data Center Operations: Aligning Supply Chain, Compliance, and Customer Expectations. The article explores key challenges for bringing new capacity online, an operational overview of data centers, contractual considerations, and customer expectations around security, availability and resilience.

Electric utilities across the country are forecasting higher than normal power demands in their service territories, driven in large part by the power needs of data centers. The US Department of Energy’s (DOE’s) Lawrence Berkeley National Laboratory estimates that data center load growth has tripled over the past decade and is projected to double or triple by 2028. These rates of growth are increasingly placing pressures on utilities, transmission planners, and grid operators to respond quickly to ensure there is sufficient infrastructure to meet the demand for power.

Merger and acquisition (M&A) activity involving data centers and digital infrastructure had a record year in 2024, and all signs point to that trend continuing in 2025. Market strategies and capital raising in this space are evolving rapidly as investors, developers, and operators seek to take advantage of the high demand. Factors that were determinative of market norms only months ago have become less relevant and new factors driving the market have emerged.

While a data center may seem similar to a large warehouse, data centers are high-intensity utility consumers that have special requirements compared to a typical warehouse acquisition project. There are several crucial items to address in negotiating purchase and sale agreements and conducting due diligence of land for the development of data centers.

A day does not go by this year without news of another major investment in data centers or the infrastructure—including facilities, power, and cooling systems—that is needed to run data centers. Notwithstanding all the data center buzz, there has not (yet) been a lot of focus on the next phase of the data center life cycle, the phase after “build,” which we refer to as the “operate” phase. With thousands of data centers already operational and many others in various stages of “build” with plans to be operational on tight time frames, it only follows that the opportunities and challenges of the data center operator will gain more attention in the evolving data center conversations.

The growing interest in generative artificial intelligence (AI) has triggered a race to develop the technology, driving demand for high-density data centers and significantly increasing predicted electricity consumption. Research from the US Energy Information Administration and Goldman Sachs indicates domestic and global record-high energy demand is quickly approaching.

The convergence of three disruptive forces—(1) migrations from on-premises data centers to the cloud, (2) the increased focus on connected device and digital solutions, and (3) the explosive rise of generative AI—has resulted in a race to finance, design, build, power, and operate data centers to support them. This growing demand for data centers is prompting significant regulatory, operational, and infrastructure developments throughout the world, including recent initiatives and investments in the United States, Europe, and the Middle East that underscore this growing momentum.

The Winter 2025 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey highlights significant changes in California’s commercial real estate market, driven by the growing adoption of cloud computing, machine learning, artificial intelligence (AI), and the shift to hybrid working models, all of which have led to data centers and related digital infrastructure being the largest growth sector in new industrial projects.