The way the world communicates, works, and learns has changed a lot over the past year, in ways that nobody was prepared for. In order to keep up with these changes, infrastructure real estate investment trusts, or REITs, will have a busy year in 2021, and investors will have a lot to keep an eye on as things progress. Here are four things infrastructure investors should know in 2021 to ensure they're making the right investment decisions.
Demand for digital infrastructure has increased faster than expected
The demand for digital infrastructure has been growing at an increasing rate ever since the first telegraph was sent over wire in 1838. However, this demand has recently grown at a faster rate than anyone anticipated as the COVID-19 pandemic left millions of people working from home and attending virtual meetings, as well as millions of students leaving the classroom for online learning.
While people have been returning to work and school, video conferencing and virtual learning will continue to be utilized much more than anyone would have anticipated just over a year ago. This means the data infrastructure that makes it all possible will need to grow faster than previously thought.
Increased demand is great, but the companies that will truly grow from it are ones that have the ability to make the capital investments necessary without overleveraging their books.
5G really is coming
I think we all expected to have 5G coverage in just about every corner of the world by now, but that obviously hasn't happened yet. On top of that, most of the 5G we do have is provided on non-stand-alone architecture. This means the full benefits of a 5G network aren't being provided yet in most cases.
In order to fully maximize the benefits 5G offers, a completely new stand-alone network is needed. This means new towers and transport networks, and billions of dollars to put it all together. The good news is that this is all being developed as we speak. However, it will likely be a few years before true 5G is widely available.
While virtually every company that owns cell towers is touting 5G, the ones that will have lasting demand will be those developing stand-alone 5G networks. The others that stand to benefit are the fiber networks connecting these new towers and small cells.
The U.S. government is investing in data infrastructure
President Biden has made it a priority to invest in the country's infrastructure, and a modern data infrastructure is a big part of that.
In December 2020, the FCC awarded $9.2 billion over 10 years in its Rural Digital Opportunity Fund Phase I auction. These funds were awarded to provide broadband to 5.2 million locations that are currently underserved.
The companies that won these bids aren't the only ones to benefit, though. Instead of multiple companies building long routes in the same direction, they will lease strands on an already existing anchor route and just build the last mile off of these routes to reach customers.
It's like building roads for a new subdivision. You don't need to build new roads connecting it directly to every other neighborhood in the country; you just need to tie into the road that's already running by it.
Satellite internet is becoming a real threat
At the same time, $885 million of the FFC's Rural Digital Opportunity Fund is going to SpaceX to serve 642,000 locations. While this is less than 10% of the fund, SpaceX's cost per location is noticeably lower than what some of the other top companies that won bids are able to provide.
SpaceX has been looked at as the top threat to fiber and cell tower infrastructure companies, but Lockheed Martin's (NYSE: LMT) Space Division also announced plans to develop a space-based 5G network with satellite start-up Omnispace. Other companies expanding their space-based data communications capabilities are AST & Science, OneWeb, and Telesat.
If any of these companies can make significant headway in the next couple of years, they could steal a lot of growth from fiber and cell tower infrastructure REITs.
How infrastructure investors can gain an edge in 2021
The world's data infrastructure is changing and growing at a rapid pace, and there have been a lot of changes in the companies developing and managing these networks.
Infrastructure investors should keep a closer eye than normal on the entire industry during 2021 as mergers and acquisitions are becoming regular news, and a single contract can make all the difference in who grows and who gets left behind.
Specifically, investors need to look closely at the balance sheets of the infrastructure companies they're considering investing in. Companies with the liquidity and easy access to capital are the ones able to land the deals to build these networks.
The Millionacres bottom line
As other REIT sectors are still trying to recover from the pandemic, infrastructure REITs are gearing up for a growth surge as the 5G rollout gains momentum and the federal government is pushing to expand broadband access to 5.2 million new locations. 2021 has the potential to be a very profitable year for infrastructure investors who play it smart.