The real estate sector was one of the market's worst performers in 2020, with the Vanguard Real Estate ETF (NYSEMKT: VNQ) declining by more than 8% for the year even though the S&P 500 gained 16%. While the sector was certainly weak, not all real estate stocks performed poorly.
Data center REITs, or real estate investment trusts, performed quite well -- in fact, Digital Realty Trust (NYSE: DLR) actually outperformed the S&P 500. The short explanation is that while most types of commercial real estate rely on people being willing and able to go places, data centers benefit from people staying at home.
When a remote worker accesses a cloud-based software program, someone browses investment articles (like you're doing now), or a teenager who is stuck at home streams a movie, all that content has to physically live somewhere. That's where data centers come in and why they were such strong performers in 2020.
However, the same can't be said for the past few months. Ever since positive COVID-19 vaccine data began emerging in November, the so-called "stay home" stocks have underperformed the "reopening stocks" that are most likely to benefit from the end of the pandemic. In fact, since Pfizer's (NYSE: PFE) initial phase three data was announced, Digital Realty has underperformed the market by about three percentage points.
This certainly makes sense. But what will Digital Realty look like in a post-pandemic world?
Digital Realty is doing well
First off, it's important to mention that even though the stock has underperformed recently, that doesn't mean Digital Realty's business has. In the third quarter of 2020, revenue grew by 27% year over year and the company actually increased its full-year FFO guidance. Leasing activity has been rather strong, and all of the company's data centers around the world remained operational throughout the duration of the pandemic.
The long-term trend is still strong
Sure, when the pandemic ends, many people will go back to work at their offices, at least on a part-time basis. There will be less content being streamed, and many people will have less time to browse their favorite websites. But that's all temporary. Well, technically the uptick in data needs from the pandemic is temporary.
The point is that the same catalysts that have caused the data center industry to grow rapidly for the past 15 years aren't slowing down. More everyday devices are being connected to the internet than ever before, and many are rather data heavy. And the gradual rollout of 5G technology will enable larger volumes of data to flow.
In fact, Digital Realty sees a "second wave" of cloud computing growth that could keep data center demand growing rapidly. For example, the artificial intelligence (AI) market is expected to grow from $11 billion in size in 2019 to $90 billion by 2025. The number of autonomous vehicles -- which process a tremendous amount of data -- is forecast to grow at a 37% annual rate through at least 2025. A new report indicates that "data gravity" (need for data solutions) for the banking and financial services, manufacturing, and insurance industries is expected to double by 2024.
I could go on. But the point is that the global need for data has been growing exponentially, and there's no reason to believe that will change, pandemic or not.
The Millionacres bottom line
So, where will Digital Realty Trust be in five years? Nobody has a crystal ball that can predict the future, and I'm certainly no exception. That said, I'd be shocked if the data center industry didn't grow significantly over the next five years, and if Digital Realty didn’t grow just as fast, or faster.