Do not underwrite a data center from a capacity headline, a vacancy statistic, or a signed-looking term sheet. Commit capital only after you can prove, for this specific site, that power will be delivered on the required date; the facility can be built within a fully scoped budget; identified customers are creditworthy and contractually committed; operations meet their technical requirements; and downside cases still satisfy your return and liquidity requirements.
Use the sequence below as an investment-committee diligence framework. Treat market forecasts as context, not as evidence that the proposed project will be energized, leased, completed, or fairly priced.
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1. Define exactly what you are buying
“Data center investment” can describe a stabilized operating facility, a powered shell, a greenfield development, or a hyperscale build-to-suit. Those structures place different risks on the investor. Start by writing a one-page definition of the asset, the stage of development, the ownership interests, and the obligations that remain outside the proposed budget.
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| Strategy | What the investor typically owns | Primary risks to investigate |
|---|---|---|
| Stabilized operating facility | Completed building, electrical and cooling systems, and an operating lease or leases | Tenant credit and retention, equipment renewal, operating reliability, power cost, and exit liquidity |
| Powered shell | Building and utility-ready infrastructure without a completed tenant fit-out | Tenant procurement, fit-out cost, delivery acceptance, timing of rent commencement, and stranded capacity |
| Greenfield development | Land, development rights, construction contracts, and a plan to create capacity | Site control, permitting, grid interconnection, construction cost and schedule, financing carry, and lease-up |
| Hyperscale build-to-suit | A facility built to a major user’s specifications, generally under a long-term lease | Concentration in one counterparty, milestone and acceptance conditions, change orders, specialized design, and consequences of a delayed or cancelled deployment |
CBRE Investment Management describes hyperscale build-to-suit as a common strategy in which a developer builds to a major user’s specifications under a long-term lease. Its analysis also distinguishes development strategies from approaches that avoid operating exposure but sacrifice recurring cash flow and valuation upside. Confirm which party owns tenant equipment, who funds expansion, and who bears replacement and compliance costs.
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Write the ownership and responsibility map
- List the legal owner of the land, building, utility assets, generators, cooling plant, network facilities, and tenant-installed equipment.
- Assign each cost to the owner or counterparty: design, interconnection, taxes, insurance, maintenance, energy, water, security, upgrades, and decommissioning.
- Record every condition that must be satisfied before capital is released, rent starts, or debt can be drawn.
- Specify what happens if the project is sold, the operator is replaced, or the anchor tenant fails to take capacity.
2. Prove that power can arrive on time
Power delivery is a project-specific question, not a regional demand story. JLL’s 2026 Global Data Center Market Outlook states: “Speed to power is the primary criteria driving site selection, followed by community support, latency and proximity to customers.” JLL’s 2025 Global Data Center Outlook adds: “In many markets it can take four years or more to have high-capacity power lines extended to new development sites.” That is a market observation, not a promise about your site.
Request primary evidence from the utility and authorities
- Obtain the utility’s written confirmation of available and contracted capacity at the exact parcel, including voltage, delivery point, firm versus interruptible service, and any seasonal limitations.
- Review the interconnection application, study results, queue position, executed agreements, required network upgrades, cost allocation, security deposits, and refund provisions.
- Map the energization path: substation work, transmission or distribution extensions, switchgear, transformers, protection studies, inspections, testing, and commercial-operation approval.
- Reconcile the utility schedule with the construction schedule and the lease’s rent-commencement or service-level dates.
- Identify who pays for each grid upgrade and who bears delay, redesign, curtailment, or cancellation risk.
- Verify the backup strategy, including generator capacity, fuel storage and replenishment, maintenance windows, black-start capability, and the limits of temporary power.
Check permits and community constraints
Collect zoning approvals, building and electrical permits, environmental reviews, water rights or discharge approvals, noise and emissions permits, road and fiber easements, and any conditions imposed by local authorities. A permit that allows a building is not necessarily permission to operate the proposed load. Tie each approval to a dated milestone and a responsible party.
Do not confuse market demand with site deliverability
CBRE’s market commentary identifies power shortages as a reason projects remain under construction for extended periods. That observation supports a diligence question; it does not establish that the proposed project will receive power. Require an independent engineer or utility adviser to confirm the load profile, redundancy topology, and energization assumptions.
3. Validate customers, capacity and lease economics
Separate addressable demand from signed, enforceable commitments. A customer expression of interest, a reservation, a memorandum of understanding, and a lease with unconditional payment obligations carry different values.
Build a tenant and contract schedule
| Item to verify | Questions for the proposed investment |
|---|---|
| Counterparty | Who is the legal tenant, parent guarantor, and ultimate credit support provider? Obtain audited financial information, ratings where available, payment history, and concentration limits. |
| Capacity | How many megawatts are contracted, at what density, voltage, redundancy level, and delivery point? Distinguish reserved, installed, commissioned, and actually utilized capacity. |
| Term and commencement | When does the lease begin, when does rent begin, and what delivery or acceptance tests can postpone commencement? |
| Payment protection | Are charges take-or-pay, capacity-reservation, usage-based, or subject to termination? Are deposits, letters of credit, parent guarantees, or step-in rights available? |
| Construction obligations | Who funds tenant fit-out, network installation, specialized cooling, and changes requested after design freeze? |
| Flexibility | What expansion, contraction, assignment, termination, early-renewal, and technology-change rights exist? |
| Remedies | What compensation applies if power, space, cooling, or connectivity is late or fails service-level tests? |
Test whether preleasing is real
For every claimed preleased megawatt, record the document type, execution date, conditions precedent, security posted, delivery milestone, and cancellation rights. A lease contingent on energization may still leave equity exposed to construction carry and debt service before rent begins. Ask whether the tenant can walk away if commissioning misses a date, if the design cannot support its density, or if an expansion decision is not approved internally.
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Match the technical design to the customer
Confirm rack density, power quality, cooling method, network routes, physical security, maintenance windows, data-residency requirements, and service-level credits. CBRE Investment Management emphasizes uninterrupted electric power and occupier-specific technical requirements. Do not assume that an existing facility can support a new workload without an engineering review of electrical, mechanical, structural, and network limits.
4. Use market statistics with the right geography and period
Vacancy, rents, absorption, and preleasing are useful only when the market definition and reporting period match the project. CBRE reported a 2.8% average vacancy rate in primary U.S. markets based on 2024 conditions in its 2025 U.S. outlook. Separately, CBRE’s North America H1 2025 report reported 1.6% vacancy in primary markets. These are different observations and must not be blended into one trend line.
Build a comparable-market set
- Use the same geography: city, primary market, North America, or another clearly defined boundary.
- Use the same period and state whether the number is a quarter-end, half-year, annual average, or forecast.
- Separate wholesale, hyperscale, colocation, enterprise, edge, and specialized high-density facilities.
- Compare delivered inventory with inventory under construction and planned capacity.
- Record whether vacancy includes unpowered or unleased shell space and whether it is measured by area, cabinets, or megawatts.
Market enthusiasm is not underwriting evidence. CBRE’s 2025 investor survey covered 92 major investors worldwide: 95% said they planned to increase data center investments in 2025, 41% planned to allocate at least $500 million of equity (up from 30% in 2024), and 39% cited regulation and power availability as the top investment challenge, versus 10% citing debt availability. The survey describes sentiment and plans; it does not establish that a particular proposal is viable or fairly priced.
5. Build a complete cost and schedule model
Per-megawatt benchmarks are useful as a reasonableness check, never as a substitute for a bottom-up budget. JLL forecasts average global data center construction cost for 2026 at $11.3 million per MW, explicitly covering shell and core. JLL also says AI infrastructure tenant fit-out can reach $25 million per MW. The latter is a possible tenant fit-out cost, not an addition that can be silently omitted or folded into the shell-and-core figure.
Include every cost layer
- Land acquisition, site preparation, grading, roads, drainage, fencing, and easements.
- Design, project management, permitting, legal, insurance, and development fees.
- Shell and core construction, structural reinforcement, fire protection, and building systems.
- Electrical service, substations, transformers, switchgear, distribution, generators, UPS systems, batteries, and fuel systems.
- Cooling plant, heat rejection, water treatment, make-up water, and discharge infrastructure.
- Utility interconnection, transmission or distribution upgrades, deposits, and inspection charges.
- Fiber, carrier entrances, meet-me rooms, network equipment, and diverse route construction.
- Tenant fit-out, racks, busways, specialized cooling, security controls, and commissioning.
- Taxes, insurance, labor, utilities during construction, operating reserves, contingency, and interest during construction.
Reconcile the schedule to procurement reality
Identify long-lead equipment and obtain supplier quotations, manufacturing slots, escalation clauses, liquidated damages, warranty terms, and substitution rights. Link the critical path to permits, utility milestones, equipment delivery, installation, integrated systems testing, tenant acceptance, and rent commencement. Model the cash cost of each month of delay, including additional interest, insurance, security, labor, and lost revenue.
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Challenge the contingency
Separate design contingency, construction contingency, owner contingency, and financing reserves. State what each can cover and who controls its release. A single percentage applied to an incomplete scope can create false precision, especially where grid upgrades, AI-density fit-out, or cooling technology remain unsettled.
6. Match financing to delivery and lease-up risk
Financing terms can turn a manageable construction delay into an equity loss. Review loan-to-cost or loan-to-value limits, draw conditions, interest-rate exposure, maturity, extension tests, completion support, guarantees, reserves, covenants, and refinancing assumptions.
Questions for the financing package
- Can debt be drawn before permits, utility agreements, fixed-price contracts, and lease conditions are complete?
- Which costs are eligible for funding, and which must be funded with equity?
- What happens to the interest rate, spread, covenants, and reserves if energization or rent commencement slips?
- Are completion guarantees capped, and does the sponsor have the liquidity to honor them?
- What occupancy, debt-service-coverage, or valuation tests apply at maturity and at each extension?
- Is the exit assumption a sale, refinancing, recapitalization, or continuing cash flow, and what evidence supports that assumption?
JLL’s 2025 outlook discusses typical sector financing ranges, but market-level ranges are not a recommended leverage level for a particular borrower or asset. Confirm the jurisdiction, lender, collateral, recourse, covenants, and pricing in the actual term sheet.
7. Underwrite operations, resilience and obsolescence
An operating data center is an engineering system as well as a real-estate asset. Review the operator’s record, staffing, preventive-maintenance program, incident history, emergency procedures, vendor dependencies, and service-level performance.
Evaluate resilience
- Verify the electrical topology, redundancy classification, maintenance bypasses, fuel autonomy, generator testing, UPS runtime, and restoration procedures.
- Review cooling redundancy, water availability, drought or heat exposure, leak detection, and the ability to operate during maintenance or equipment failure.
- Test physical security, cyber-physical controls, access logging, fire detection and suppression, and incident escalation.
- Confirm insurance limits, exclusions, deductibles, business-interruption coverage, and responsibility for uninsured losses.
- Examine energy procurement, renewable claims, carbon reporting, efficiency targets, and exposure to power-price volatility.
Assess technical obsolescence
Model refresh cycles for UPS systems, batteries, generators, chillers, controls, network equipment, and tenant infrastructure. Confirm floor loading, ceiling height, busway capacity, liquid-cooling compatibility, and the cost of converting space for higher-density workloads. A facility that is technically adequate for today’s tenant may require substantial capital before it can serve a later generation of accelerators.
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8. Stress-test the investment before approving it
Base-case returns are not enough. Build an integrated monthly model that connects power, construction, leasing, operations, financing, and exit assumptions. Then test the events that can occur together rather than one at a time.
Minimum downside cases
- Power energization is delayed by six, 12, and 24 months, with construction interest and overhead continuing.
- Permits or environmental approvals arrive late, forcing resequencing and remobilization.
- Electrical, cooling, or tenant fit-out costs exceed budget and long-lead equipment escalates.
- The anchor tenant delays commencement, takes less capacity, defaults, or exercises a termination right.
- Lease-up is slower and rents or recoveries are lower than underwritten.
- Interest expense rises, a loan extension is unavailable, or refinancing requires additional equity.
- Cap rates expand, comparable transactions weaken, or the exit is delayed because buyers discount specialized infrastructure.
- Operating costs, insurance, taxes, or power prices rise faster than contractual recoveries.
Measure what equity can lose
Show the effect on total development cost, peak equity, completion date, rent commencement, debt service, coverage ratios, cash-on-cash yield, internal rate of return, multiple on invested capital, and exit value. Identify the first covenant breach and the month in which additional equity is required. Distinguish risks that can be transferred through fixed-price contracts, guarantees, liquidated damages, or lease security from risks that remain with equity.
9. Set evidence-based capital-release gates
Use staged commitments rather than a single approval for the entire project. Each gate should require documents that an independent reviewer can verify.
| Gate | Evidence to require | Decision if evidence is incomplete |
|---|---|---|
| Site control | Executed purchase or lease rights, title, easements, zoning path, environmental baseline, and termination protections | Do not fund irreversible site work beyond approved diligence spend |
| Power | Utility correspondence, interconnection studies and agreements, upgrade scope, deposits, energization milestones, and delay allocation | Reprice, redesign, or defer approval until deliverability is independently confirmed |
| Permits | Issued approvals or a documented critical path with conditions, responsible parties, and appeal risk | Limit funding to permitted work and preserve cancellation rights |
| Construction | Complete design, competitively validated pricing, contract terms, procurement schedule, contingency, and commissioning plan | Require a revised budget or additional sponsor support |
| Leasing | Executed contracts, tenant credit, security, capacity schedule, acceptance tests, and remedies for late delivery | Underwrite the uncommitted capacity at a conservative lease-up pace or do not proceed |
| Financing | Committed facility, draw conditions, hedging, reserves, completion support, covenants, and maturity plan | Do not rely on indicative debt to justify the equity commitment |
| Commissioning | Integrated systems testing, utility acceptance, tenant sign-off, service-level readiness, insurance, and operating procedures | Hold rent commencement and final equity release until acceptance is documented |
10. Compare proposals on a consistent basis
When choosing among sites or investment structures, normalize the comparison. Use the same capacity definition, geography, reporting period, currency, tax treatment, construction scope, leverage, and exit convention.
| Comparison axis | Evidence to place side by side |
|---|---|
| Asset stage and strategy | Operating, powered shell, greenfield, or build-to-suit; ownership and operating responsibilities |
| Secured and deliverable power | Contracted MW, redundancy, utility milestones, energization date, upgrade cost, and delay remedies |
| Market and tenant segment | Primary or secondary market, wholesale, hyperscale, colocation, enterprise, edge, or specialized workload |
| Lease commitment and credit | Contracted MW, term, commencement, security, counterparty credit, options, and termination rights |
| Total cost and schedule | Fully scoped cost per MW, tenant fit-out, contingency, long-lead items, critical path, and completion date |
| Financing | Leverage, pricing, hedging, reserves, covenants, recourse, maturity, and extension rights |
| Operations and technical fit | Redundancy, cooling, density, connectivity, staffing, maintenance, security, insurance, and refresh capital |
| Downside returns and exit | Peak equity, covenant headroom, delayed-power case, tenant-default case, exit liquidity, and sensitivity to cap-rate expansion |
11. Recognize common diligence failures
Using a regional vacancy rate as proof of lease-up
A low vacancy statistic can coexist with a project that lacks power, has the wrong density, or is in a submarket with different connectivity and customer economics. Keep the geography, period, facility segment, and measurement basis attached to every market number.
Treating “available power” as energized power
Capacity in a planning document, queue, or nonbinding utility letter is not the same as tested service at the building. Require executed milestones and a schedule that accounts for upgrades, inspections, and commissioning.
Quoting shell-and-core cost as total capex
The $11.3 million-per-MW global 2026 forecast from JLL covers shell and core. AI tenant fit-out can reach $25 million per MW. Reconcile those scopes with the actual design before calculating returns.
Counting preleasing without reading conditions
Record acceptance tests, rent triggers, deposits, termination rights, and remedies. Capacity that is contractually contingent on late power or tenant approvals should not be valued like in-service revenue.
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Relying on investor enthusiasm
CBRE’s survey results show strong intentions and highlight regulation and power availability as a challenge. They do not validate a project budget, lease, utility agreement, or exit price.
Approving a single-point forecast
A model that has no delayed-energization, cost-overrun, tenant-default, rate, or exit sensitivity hides the decisions that matter most. Make the investment committee approve the assumptions and the downside limits, not just the base-case return.
12. Prepare the investment-committee decision
Your approval paper should let a reader trace every material assumption to a contract, utility document, permit, engineering report, tenant credit file, or clearly labeled market observation. Include a sources-and-dates column for market statistics so that the 2.8% U.S. 2024 vacancy observation and the separate 1.6% North America H1 2025 observation cannot be mistaken for one series.
State the proposed commitment, maximum additional equity, capital-release gates, unresolved conditions, downside results, and the person responsible for each closing action. If a critical item cannot be verified, present it as an explicit condition to funding rather than burying it in a narrative risk section.
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The final decision is not whether data centers are attractive in general. It is whether this asset has demonstrable power, permits, construction economics, customer obligations, operational capability, financing support, and risk-adjusted returns at the price and structure proposed.
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