Digital Realty and Realty Income have established a joint venture to support the development of two build-to-suit data centers in Northern Virginia.  

Realty Income received 80% equity for $200 million, while Digital Realty maintains a 20% interest. Each partner will fund its pro rata share of the remaining $150 million estimated development cost for the project’s first phase, which is set to be completed in mid-2024.  

The build-to-suit facilities were 100% pre-leased to an S&P 100 investment-grade client before construction and are expected to generate a 6.9% initial cash lease yield upon lease commencement in mid-2024. Both data center facilities are subject to a 10-year initial lease term with extension options and 2.0% annual rent escalators.

The two build-to-suit data centers began construction in the fourth quarter of 2022 and are slated to deliver 16 megawatts (MW) of initial data center capacity, which is expandable up to 48MW at the client’s option. The data centers are budgeted at about $400 million for the first phase of these yield-on-cost developments.  

Based on current development cost estimates, the client can expand the projects up to 48MW of total capacity during the initial lease term, which could increase the budget to $800 million.

“Forming this development joint venture supports our customer’s build-to-suit requirements with a like-minded, long-term investor as our partner,” said Andy Power, President and CEO of Digital Realty. “The transaction also further bolsters and diversifies Digital Realty’s capital sources while enhancing our flexibility to support our stakeholders’ longer-term capacity requirements prudently.”

This is Realty Income’s first investment in the data center space.

“One of Realty Income’s core strategies is to partner with companies that are leaders in their respective industries. To that end, for our initial investment in the net lease data center vertical, we are pleased to partner with Digital Realty, the largest provider of cloud- and carrier-neutral data centers whose global platform is well respected in the industry,” said Sumit Roy, President and CEO of Realty Income. “This transaction offers our stockholders attractive risk-adjusted returns and will support the development of two state-of-the-art facilities located in Northern Virginia, the largest data center market in the world.”