The Real Estate Behind the Data Center Boom

0:05Lilah Burke: Welcome to Deconstruct, a podcast from The Real Deal.

0:09Hannah Kramer: I'm Lila Burke. And I'm Hannah Kramer. And this week we'll take you through how Compass's fall listings playbook is impacting StreetEasy listings, why S2 Capital is the multifamily syndicator that just won't quit, and why the future of Hollywood real estate might look more like influencer real estate than movie soundstages.

0:27Lilah Burke: And for our main interview, Collier's Raul Saavedra will be joining us to talk about the data center boom. Let's get started.

0:39Hannah Kramer: Today on Deconstruct, we want to talk about a real estate trend that has become incredibly powerful in the last year or so since we've been tracking it, and really, I think, for some time before that. So today, we have data center expert Raul Saavedra from Collier's on with us. Raul, thanks for joining the pod. Thank you for having me.

0:57Lilah Burke: So you have been doing this work in data center brokerage for a long time. What does that look like? How has that changed? Well, there still aren't that many of us, but when I started, there were very few. There were many that were, hey, well, I'm doing industrial part-time, maybe office part-time, and I'm doing a little bit of data center. But that has changed. I came in this completely devoted to data center, and so that's probably one of my competitive advantages, coupled with the fact that I came from the principal side.

1:26Hannah Kramer: When did you start to see this big uptick? When I first started in this sector, it was on the principal side. So I started at Digital Realty, which is a very large REIT. Just to give you perspective, when I started there, the market cap of Digital Realty was approximately$6 billion. Now it's 70-something. I think it was 73 as of yesterday. And that's in a relatively short amount of time, 15 years. So that just gives you a sense of how much this sector has grown. Technology companies drove so much of this space early and still do. But what I would say where things really changed in this sector was COVID.

2:06So you just saw this massive uptick of compute. And then, of course, then separately after AI. That time with COVID was when things just exploded. And that's when I was like, OK, now this is a radical change. And you just saw this crazy growth. And the market wasn't ready to respond to it.

2:25Lilah Burke: And I'm wondering if you can tell us a little bit about how a data center deal gets done. I mean, really the basics. It's a marketing effort, just like any other developer. You package it up and then you hope that that counterparty, which is typically going to be a hyperscaler, is going to be interested. And then if they are, you have to negotiate a deal that's really complex. You have to have the financing in place and then you've got to be ready to execute and build. So you have to have a physical structure that works. With that goes mechanical electrical plumbing. What I tell people is it's very much like building an airplane, right, where you don't want something to go wrong.

3:01Now, the other aspect of that is the utility. And that has increased significantly on a per unit basis. You know, I mentioned before, a large campus or, you know, data center building would be 30 to 50 megawatts. Now users are looking for, you know, 500 plus. And so the other part of it is the utility. And that is a lot more than anyone ever intended. And so that is where you see, okay, wait a second, we were reactive, how do we be proactive? And so this has turned into a, hey, let's do something in a year or two, to now you're talking about something that could be 36 months out, four years out, and you have to take a lot more risk than you did before, because the check size is so great.

3:44We're talking about from millions to billions.

3:47Hannah Kramer: I do want to talk about, you know, the sort of political angle to this, right? These are incredibly complex deals. A lot of money is coming into them. A lot of attention has been put on them. How much of a factor is it now that, you know, you have all these headlines and you might have a site that seems great. You know, you can source the power. You have a seller who's willing to sell or a developer who's able to come into the site. but neighbors who don't want this. How are you guys working around that? You know, this business often was secretive because the users wanted it to be that way. And so now there's this shift.

4:23And I think what you're going to see is there's going to be a lot more collaboration on the front end to say, well, okay, well, here's what we're doing. This is why it's a net benefit to you. And I look at that as an opportunity. And so, hey, maybe just more collaboration, more communication in terms of here's the benefit. Right. And so people are jumping to conclusions because in fairness to the folks in the community, if they don't know, then they're going to just assume things. So this is an educational opportunity is the way I look at it. And I think you're going to start seeing that more and more.

4:55Lilah Burke: How big of a consideration in these deals is the political component? I think the governor of I believe it was New York said it best, right, where she was like, hey, I want to understand this. Right. I want to understand this more. So this goes back to opportunity. Meet it head on. Go in there and say, OK, what are your sensitivities? Here's what I'm doing. This is why you should not be concerned. In lieu of that, people are going to jump to conclusions.

5:23Hannah Kramer: Another thing that we certainly have heard about is these large blue chip investment firms really starting to take an interest in this sector. I'm wondering how much the financing of these sorts of deals has changed from a time where 10 years ago, this is a small niche, but perhaps a more stable one. When I first got in the sector, oftentimes when you're talking about values, it was a cap rate discussion. It was just like very vanilla real estate. Like, hey, what's the NOI? There's a market yielding cap rate, right? What's changed is the light has gone off. And I think most have realized, given the scale and the risk, let's change this into even a multiple discussion.

6:07Let's build a platform. So we don't just have the real estate. We have an operating company. And that's when the investment bankers entered the sector. When I first got in the business, it was not necessarily a lot of attention from investment bankers. Now, pretty much all the top investment banking shops are involved. There's a number of portfolio sales out there. and it's like being co-run by multiple banks, much like a lot of the M &A at the larger companies. That didn't exist before. Okay, so I think that speaks volumes to the financial engineering required to execute in this space. And I don't see that changing.

6:39I think that's gonna shift very quickly. So for someone like me, that's where I'm like, I have to wake up and realize like, hey, things have changed, right? I'm gonna have to change my business plan because it's become so much and more of an investment banking exercise. And so you have to be a real financial engineer. You know, you asked me before what it takes, you know, to execute. Well, let's say you do get a tenant. The tenant's going to want to make sure that you can actually build it out. And so you have to be able to demonstrate that you have the financial capability to do that. So on the front end, you better have that balance sheet or a partnership with a sponsor, probably an infrastructure fund, a very large private equity firm.

7:22And then after that, you can quickly demonstrate to them like, hey, I'm already ready to, you know, finance out some risk based on this leasehold. But I can go up to here and then I've already had the bankers in tow so I can execute and be able to raise more money to build this massive project. So I don't see that changing. I see probably some consolidation because it's just so hard to run these platforms and the users are so sophisticated. where they want that consistency, much like going back to the airline business, United, Delta, you want that track record.

8:00Lilah Burke: And when you speak with people, it seems like people are very excited about this data center boom. So I'm going to go back to your last question and answer it with that. I would say I had an opportunity to put some there. So look, you know, going back to what I mentioned before with COVID, et cetera, you know, the data center sector definitely probably benefited from the weakness of the other asset classes. So if you already had like a lot of money that you raised, and you know, you're looking to get a return, which you promised your investors when you raise the money, and you can't invest in office or industrial multifamily, you're going to pivot to where you can't get those returns.

8:41And so that's where, you know, the data center sector became the bell of the ball. And then you realized, well, wow, there's a lot more capital deployment opportunity, right, where I can write bigger checks here. And so it kind of checked a couple different boxes, right? Now, at the same time, AI comes along. And you can't have AI without data center, you know, footprint, okay, because that compute has to live somewhere. So what I would say is, I don't see the demand tapering off. The market size has doubled in the last 36 months. It's going to double again in the next few years. There are challenges because there isn't utility, etc.

9:20But what I would say is I don't see that interest changing.

9:24Lilah Burke: Are you getting a lot of calls from people about potentially harnessing this boom, trying to get in on it? Yes, for sure. And I am sympathetic. It's in the paper every day. People are reading about these massive deals. and you're hoping that office building you have or that industrial property that you have can be a data center. The challenge is there are so many key components that you have to have and you have to be able to represent that you have them. No one really wants to engage with you until you can prove that you have them, right? And that's the challenge because you have to spend a lot of money and time to get there.

10:01And so, you know, I have these calls and you're part therapists there in these conversations where they're like, okay, I just want to list this. I think I have a data center. And you say, well, why do you think you have a data center? And then you'll ask, is the reason you think you have a data center because you can't monetize it another way? That's not a good reason to think that you have a data center. This is by far the riskiest asset class with not a close second. And so if you don't have that risk gene, then this is probably not the sector for you.

10:30Hannah Kramer: All right. I think we have a lot of news yet to report about the data center sector. Raul, thank you so much for your insights. We'll talk to you again soon. Thanks for your time. Have a great day.

10:48Hannah Kramer: Let's talk about a classic Los Angeles story this week. Lila, I know you've been doing some research about the future of what I would call Hollywood real estate. Tell us about that.

10:59Lilah Burke: Right. So this is a story that is kind of about influencers and how real estate is trying to capitalize on the so-called creator economy. So influencing is not new, but there's a sense that the video aspect of it all has really taken off. You can see this a lot in LA. Los Angeles is the soundstage capital of the world with 8 million square feet of studio space. And real estate companies are now trying to to reorient that space toward influencers. There's a sense here that Hollywood has really not been the engine that it once was. There was a demand for soundstages early in the pandemic, but that fell off.

11:41Lilah Burke: LA overbuilt. And that supply-demand crunch hit at the exact right time of the actors and writers' strikes of 2021. So Hollywood not doing so well, but influencers are very big. The creator economy market is worth about$70 billion, according to some market research firms. Now developers are trying to reposition their studio space to take advantage of that market. So they are, you know, offering smaller spaces for smaller budgets for folks who want to take apart their sets every week. So these can be podcasters, YouTubers, this sort of new entertainment industry of folks who are filming but who aren't filming a major blockbuster.

12:25Lilah Burke: Right.

12:26Hannah Kramer: And it makes sense to me that, you know, as the future of entertainment shifts and people do look more towards what they're watching on TikTok or Twitch or whatever their streaming platform of choice is, as they look more towards that than the classic movies, you know, some of the movie infrastructure has to change, too. But this has a pretty big impact, not just on, you know, soundstage developers, although that's a big part of this, but there are also people in the multifamily office space who are looking at this trend, too, right? Right.

12:56Lilah Burke: So you're also seeing these creator economy co-working spaces pop up. So there's the Lighthouse in Venice and in Greenpoint, Brooklyn. They are offering a sort of creator ecosystem of co-working and other spaces like multifamily buildings, as you said, and condo buildings are offering podcast studios, hair and makeup, rooms, editing bays, test kitchens, all so that you can edit. do a podcast from your home, I guess. I think in L.A., this might have more staying power. I'm a little skeptical of how much people in New York, at least in the multifamily space, how much people are really taking advantage of these new amenities.

13:39Hannah Kramer: Yeah, I definitely wonder if this is the kind of amenity that will go, you know, the way of the movie studio or the cold plunge where people feel like they have to have them to compete and they end up sitting empty a lot of the time.

13:52Lilah Burke: Right. There's a sort of condo amenity arms race here. I've seen pottery studios. I don't know how much those are getting used. So it might be sort of a blip. But everyone is trying to get in on the video short form video economy, including us, including us.

14:08Hannah Kramer: And if you have free podcast studio space for us, we're open to it.

14:13Lilah Burke: We're renovating.

14:14Hannah Kramer: Just kidding. We're not. But I think it's also, you know, interesting to think about how soundstages have had all of this trouble in the last few years. And now they really, you know, are sort of struggling to shift their thinking, their demand. And maybe the soundstage industry might not be the most exciting part of the kind of industrial real estate market anymore.

14:34Lilah Burke: Well, I will say it's struggling in L.A., but other places like Illinois and Georgia and even New York are really trying to build up their soundstage capabilities and are offering a lot of tax benefits to try to lure movie studios out of California.

14:50Hannah Kramer: Yeah. So that's something that we'll be watching as well. If you're building a soundstage in a unique market, shoot us a message. We'd be interested to hear about it. Thanks for telling us about that, Lila.

15:02All right.

15:03Hannah Kramer: Before we wrap, let's dive into a couple of the most important headlines in real estate this week.

15:08Lilah Burke: OK, I've been hearing a lot about Compass and StreetEasy. Can you tell me about that, Hannah? Absolutely.

15:14Hannah Kramer: So Compass, which is really a mega brokerage at this point, we have for quite some time been tracking their battle over listings. Who gets to control them? Who decides, you know, when you need to list them and where? Their biggest sort of target for this is Zillow. Zillow is the 800-pound gorilla in the listings room, right? Now, here in New York, we have a really interesting test case for just how powerful Compass has become and its ability to control listings. Early this year, Compass closed its merger with Anywhere Real Estate, which brought Corcoran and Sotheby's under its umbrella. Some estimates have suggested that that gives Compass something like an 80 percent market share over residential brokerage here in New York, which is obviously enormous.

15:57Hannah Kramer: And I should say there are some antitrust concerns and there has been talk of an investigation into that. We don't know exactly where that will go. But what we do know is the Compass is starting to roll out its playbook for how to kind of control the market of listings and making some suggestions to brokers. And what are those suggestions? So in its fall marketing playbook, the first kind of big step, and Compass was very cautious to say this is a suggestion, not a demand, but the first big step was for brokers to delist their homes from StreetEasy to take listings off of that public market. Now, that isn't the only step in the process, right?

16:36Hannah Kramer: We got a hold of an email from July 27th that shows that the delisting from StreetEasy is the first step. And then Compass recommended that brokers take their listings on the RLS, which is the sort of agent-driven listings platform that is run by REBNY, the Real Estate Board of New York, take those off market as well, and then put those back on the RLS, but list them as participant only. So they're really only getting shared with other brokers and not with, you know, consumers, people who are either just browsing or house hunting online.

17:07Lilah Burke: OK, so this seems like a lot less visibility into the market for buyers here.

17:11Hannah Kramer: Yeah, I mean, it certainly appears that way to me. Right. And StreetEasy definitely had some some harsh words for Compass. You can read their statement in our story online. But we kind of wanted to take a look at whether this has a real impact. Right. And so we were able to dig into some of the numbers from StreetEasy. Now, I should say August is always slow in the brokerage world. People go on vacation. Not a lot of people buying homes in August. So it's normal that some homes would get delisted from platforms like StreetEasy anyways. But when we looked at 2025, 2024, 2023, StreetEasy listings fell about 3 % in August in those periods.

17:48Hannah Kramer: In the first week of August this month, StreetEasy listings fell 7%. And by the second week, that had increased to 11%. When we look at the RLS, we're able to get data from Donna Olshan that gives us a little bit of finer grain detail on that, right? And what we saw there was that Compass's RLS listings fell 18 % in August through August 13th when we pulled this data. Compare that to Douglas Elliman. Their listings fell 6 percent. Brown-Harris-Stevens, 8 percent. And then when you look at Corcoran and Sotheby's, which again are now under that Compass umbrella, their listings fell 8 percent and 9 percent respectively.

18:29Lilah Burke: OK, there's a lot of numbers here, but basically the takeaway is that other brokerages had their listings fall only a fraction of what Compass's did. Yeah.

18:37Hannah Kramer: So we're definitely seeing, you know, that Compass agents are at the very least being a little bit more aggressive with this policy of delisting and then of sharing their listings only kind of among agents. Right. Which goes back to that private listings strategy that Compass has been pushing so hard. So the fall will be a real test to see, you know, whether this sticks, which listings come back on the market and whether Compass can really start to sort of set the tone for where listings live and who controls them. Great. Well, we will have to keep watching. We will.

19:09Hannah Kramer: Let's head down to the Sunbelt. S2 Capital is a multifamily syndicator that we have been tracking for quite some time. Tell me the latest there.

19:18Lilah Burke: Right. So S2 Capital is a syndicator that just won't die. To refresh, S2 is sort of the last man standing of these multifamily syndicators that had this sort of wave and have since been really struggling with the rise in interest rates. Scott Everett, S2's founder, you know, sort of had this rags to riches story. He had had this, you know, sort of hardscrabble life. He was on food stamps. He had become a parent at a young age. And S2 really catapulted him to this more wealthy lifestyle. You know, he's vacationing now, as people are pointing out. His wife is an influencer. But S2 has also been struggling in the same way that other multifamily syndicators in the Sun Belt have.

20:04Lilah Burke: They folded their first fund of$400 million with no return to equity investors. They also folded up their REIT, which was meant to extend the amount of time to continue operating after interest rates rose. And this was famously the guy who said fixed rate is for suckers. Don't really know how he's feeling about that right now.

20:26Hannah Kramer: Oh, yeah, I would guess probably not feeling great about the fixed rate is for suckers comment. Now he went on one of these popular, you know, retweet podcasts and was talking about this structure. And it was just it's kind of a crazy thing because it was such a topic of conversation among some of these, you know, kind of inexperienced real estate investors who got in and said basically, wow, buy multifamily, fix it up, rent it higher, mint money. Right. And here you have, you know, we've had all of these guys struggling. But Scott Everett, I mean, to give him some form of credit, I mean, he keeps it going.

20:59Hannah Kramer: Tell us how he's keeping it going now.

21:01Lilah Burke: Right. So the news here is that he started this continuation vehicle and is trying to raise money again. It's a little unclear how that's going to go. In the rise and fall of S2, online trolls have really come together to hate on Scott Everett and pick apart his photos that he's posting and just basically start kind of an old-style flame war with him. And our reporter, Jess Harden, also visited some of the properties that S2 has bought and, you know, looked at some really troubling conditions there. So Scott Everett is really trying to make it work. A little unclear how that's going to go in the future.

21:41Hannah Kramer: Right. And I think one of the questions, at least for me at this point, is, you know, is he trying to make it work for himself? or for these properties. And so we are going to have Jess on in the next couple of weeks and see what she thinks about it. Looking forward to it. That's all we have for you today, folks. Thanks for joining us. Take care. Our script today was written by Lila Burke and Hannah Kramer, edited by Kara Eisenpress, and our in-room producers were Mary Deduk and Usha Sukai. Our sound engineer and post-producer is Mila Miller.