Few can doubt that the future of investment in America is in technology, and the future of technology is in data. As Texas deals with a historic cold snap the nation is seeing the knock-on effect of power supply affecting the throughput and capacity of their company websites. As Amazon and Google work to move data capacity away from Texas and to other parts of the country we’re seeing the future of technology unfold. The real estate requirements that support the future of technology, the land and buildings that house massive, and power-consuming data centers. The world currently is home to about seven billion internet-connected devices, and that number continues to grow. Most of these devices generate a constant flow of data that must be captured, routed, stored, evaluated, and retrieved. With the rise of the Internet of Things (IoT), entire industries rely on big data and data analytics, and the demand for data centers has never been greater. The opportunities set is also fantastic. The real estate opportunity for data centers is great, the land is generally speaking cheap, and the capacity for improvement is great. Historically, the ability to improve on raw land was limited to a location’s proximity to expanding cities. The rise in data centers, however, expands that opportunity set to include high-powered data centers that are only limited by their supply of power and limited human capital to man the facilities. The growing number of companies outsourcing their data operations to third-party providers that specialize in data center operations is the next digital gold rush. Colocation data centers are especially popular because they provide physical space, power, and cooling systems for servers and connections to local communication networks without the long-term capital expenses required by the company. Additionally, this allows companies that are not inherently “tech” companies, to house and manage their own data with proficiencies they may not have today. Large colocation providers include Iron Mountain, QTS, Equinix, CoreSite, Digital Realty, Compass Data Centers, and Cologix, which provide rentable space up to 100,000 square feet or more. InSight expects the global data center market to grow at a growth rate exceeding 2% a year from 2021-2027, and possibly 3-4% in the decade from 2030-2040. In the U.S. alone, we expect the data center market is expected to reach revenues of over $69 billion by 2024. The most likely expansion in the space is going to be in colocation service providers and hyperscale data centers (owned and operated by the company it supports, such as Apple or Google). In the U.S., the strongest growth by region has been and is likely to continue to be in the pacific northwest and the southeast. Where do we expect to see Data Center growth? A few macro drivers InSight thinks will become more prolific in the decades to come are also fueling the demand for data center capacity and superiority. Payments (including crypto) and direct-to-consumer content (AppleTV, Netflix, Google, Amazon Prime, Disney+, etc.) along with video meeting and communication services (Zoom, Webex, and Google Meet) we think will be major sea changes in the coming economy. The backbone of these services will be the speed and capacity that data centers will compete on. We think the growth in those business categories, coupled with the below existing trends will generate an insatiable desire for data to improve business performance is driving the growth of the data center industry. Key current drivers include: Internet of Things—the U.S. is one of the leading markets for industrial IoT-driven technologies, including artificial intelligence, data and analytics, security, and communication Cloud storage—the use of cloud computing services and applications continues to grow rapidly in the U.S., thereby leading to the establishment of large colocation cloud-based data centers Submarine cable projects along the east coast—these bring extremely high-speed data from Europe and South America to the east coast, where it is routed to data centers where they come ashore (for example, Virginia Beach) Tax incentives—in recent years, data center growth has been concentrated in regions that provide tax incentives, including state and local governments that provide investment incentives (often energy-based like Texas) Why does InSight think this will be a steady investment? The long-term expectations for space are something we like to plan for. The growing data needs—ranging from Tier 1 facilities (least complex and secure) to Tier 4 (very complex with high IT/security requirements), is palpable. The best places for these locations have low energy costs and top-notch communications infrastructure, they also benefit from low and manageable state taxes and property taxes, and low land cost. Additionally, as companies have moved away from owning and operating their own data centers they have left behind abandoned space that can be upgraded into modern data centers. When these locations are in the right places and have the good supporting infrastructure and low energy costs, colocation service providers purchase them. How do these companies meet future storage needs? In the current landscape, the Data-center providers are not building enough new capacity to meet demand. Applications for data and data-backed technologies are far more prolific than the centers are being built. Artificial intelligence and machine learning, the Internet of Things, Payments, Streaming Services, and Real-Time Video services continue to grow. So must the need for next-generation strategies and technologies to transform how we store, manage, and move data. One problem the colocation and data centers are solving is the byproduct of machine-to-machine technologies. As they continue to generate enormous volumes of data, which is expensive to transmit and store, the solution being considered is integrated colocation. This allows data centers to interconnect and collaboratively support each other and share assets, creating broad capacity and the creation of districts or corridors for data centers to support each other and load balance when needed. Data-centers are also finding efficiencies through automation, whereby a single administrator can manage thousands of servers simultaneously. The effort of automation is being led by advanced IT equipment and data center infrastructure management software providers.

What is a Qualified Opportunity Zone Property? The 2017 Tax Cuts and Jobs Act created special tax incentives for those willing to risk their own capital to improve and develop the real estate in traditionally underinvested sections of the country called opportunity zones. The goal was to raise long term capital by incentivizing investors that historically wouldn’t invest in these types of opportunities due to the inherent risk. They’re designed with the purpose to benefit the denizens of those locations and investors looking for sizable tax incentives to commit capital. The Qualified Opportunity Zone program is the solution that provides that tax incentive for private, long-term investment in economically distressed communities. What makes it a Qualified Opportunity Zone (QOZ)? The definition for this type of zone is “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” The process for designation of the OZ is pretty straight forward. All 50 states are allowed to submit a list of blocks of low-income tracts across their state based on census data. The Treasury then approves their inclusion in the program or not (most were approved). Plans are now in place with municipal and state governments to commit to projects that bring new construction projects into these areas. What are some unique risks you should be familiar with before you invest in an OZ? Market Liquidity – the markets for these investments are immature. There is a sizable pool of available capital for investment, but most of it is from long view institutional investors. The long term, committed and disciplined capital on the ask side, and the insurability for most investors in this space supplying the bid likely means that the spreads widen and limit overall liquidity for investors. Vehicle Liquidity – The types of vehicles offering exposure to this space are limited, largely non traded REITs. These agreements have a very long view of the investments and capital and few offer the liquidation windows and frequency temperamental investors might be used to. Asking yourself what kind of liquidity and income requirements do you have in your investment plan is more important than ever. Investors seeking income starting day 1 may need to find investments that reflect that and will see their upside limited as a result. Those seeking to “time the market” through this development will be frustrated by the duration of these investments.  Investment Risk – investment in “economically-distressed communities” carries a very unique risk that the investment will not perform on par with other parts of a city or market. Their unique performance risk with these investments will never go away, simply put you are buying into a major turnaround story in some parts of the country that may never come. This is mitigated by a few factors, the managers selecting and overseeing the projects are more important than ever. Picking the right project, with the right builder, in the right neighborhood is more important than ever.  Intent – why are you committing capital to these projects? Is it only for income? Are there parts of the country that have an emotional connection to their success? Is this a good attribute or a negative? I think it’s important to have a real honest sense of purpose in these investments. Not only to help understand and mitigate the risks involved but to help you price in the purpose of this investment. More and more people want to know that the dollars they are investing are being used for societal benefit, but make sure you are handicapping that expectation appropriately. Tax – The tax benefit for OZ’s has a pretty long ark, and the year over year benefit changes over time. Before you enjoy the tax benefits afforded here you should confirm a couple of assumptions. First, that your tax liability is ample enough to enjoy the full benefit, second, that your tax strategy for the next decade marries well with the long term requirement of this investment and third, there are no alternative strategies for a similar tax benefit with less inherent risk. Confirming these three elements of taxation and its accompanying strategy is an essential step for your CFP and CPA before you should consider the upside of this program.  Statutory Risk – the Tax Cuts and Jobs Act (TCJA) is current law, and planning for current law is not the issue. Tracking and making sure this new tax strategy stays intact going forward should be on an investor’s mind and having a plan of action if and when conditions change is part of the monitoring process for both your entire plan and this specific investment. Laws change and this opportunity is set to expire 12/31/2026.  Regulatory Risk – as I said before, the inclusion of a region in an opportunity zone is pretty straight forward, but the regulatory requirement for maintaining that acceptance by the U.S. Treasury is still important. Making sure that the project, builder, and fund all stays focused on the regulations that keep it inside the tax purview is eminently important. Selecting a manager that is versed in the regulations and will do the property due diligence to stay in the lane is important. The risk is the loss of the tax benefits you have likely priced into your expectations.  Opportunity Zones have the ability to be truly transformative for communities and investors. A fantastic marriage of social benefit, long term capital investment, and tax benefit make for an appealing place to see a reasonable return. But taking advantage of this program for non-institutional investors is going to have a few parties you should consult to confirm the investment is right for you: a CFP to confirm that this investment works in your personal financial plan a CPA that understands the full tax benefits of this investment an estate plan that can accommodate the long duration of this type of an investment an investment manager that understands and mitigates the risks as best as possible an investment advisor that helps