Digital Realty has been named in press reports from The Business Journals, via disclosures from the Santa Clara County Recorder’s Office, noting that it has sold its data center at 150 South 1st Street in San Jose, California to Hines, a real estate investor and developer, for $59.6m.

150 South 1st Street – Digital Realty Sells to Hines

Digital Realty’s 150 South 1st Street facility was built in 1986 and renovated in 1999. This two-story, mixed-use property resides on a 2.4-acre site, with 179.8k sqft of total rentable area. Presently, the building permits the following three uses:

  • Data Center: 7.2 megawatts of critical power and 128.2k sqft
  • Retail: 41.9k sqft on the ground floor
  • Office: 9.7k sqft
150 South 1st Street San Jose California Site Map

Situated along South 1st Street, Digital Realty’s facility is two blocks from Santa Clara Street, which is the main road of San Jose’s downtown area. Also, this location will be home to the future Downtown San Jose BART Station (VTA) that will span 1st Street and 2nd Street.

Tenants

Per commercial real estate broker CBRE, the buildings were 96% leased overall. For example, Rackspace Technology (NASDAQ: RXT) operates its San Jose (SJC2) facility out of Digital Realty’s 150 South 1st Street data center. Through SJC2, Rackspace offers 5.4 megawatts of UPS power capacity across 65k sqft of raised floor space.

More broadly, as of Q3 2021, Rackspace is Digital Realty’s 12th largest customer and operates at 22 of its locations. Overall, Rackspace contributes $66.6m of annualized recurring revenue to Digital Realty, on an 8.7-year weighted average remaining lease term.

Financial References

Below are historical financial reference points for Digital Realty’s 150 South 1st Street facility:

  • Acquisition: Digital Realty acquired the building in September 2004 for $36.8m. At this time, the facility was known as the AboveNet Data Center and was majority-leased to AboveNet, a company that was ultimately acquired by Zayo
  • Debt: in February 2007, Digital Realty secured debt financing on the data center via a $53.3m loan. This loan had a 10-year term (i.e., February 2017 maturity date)
  • Carrying Value: as of December 31, 2019, the building, including improvements, had a book value of $32.8m
  • Rent: as of September 30, 2017, the facility generated $7.5m of annualized rent

Based on the above metrics, Digital Realty’s 150 South 1st Street facility had an annualized rent per sqft of $41.93.

Development Opportunity

CBRE notes that the 150 South 1st Street data center represents a “development opportunity”. Specifically, CBRE highlights that within a 3-block radius of 150 South 1st Street, 2.3k residential units are under construction and 3.9k residential units have been planned/approved.

Given this backdrop and Hines’ expertise as a real estate developer, Digital Realty’s San Jose data center may be redeveloped under Hines’ ownership. Indeed, Hines has experience developing across several urban-focused real estate property types including office, residential, and retail.

Digital Realty – Capital Recycling

Digital Realty’s sale to Hines closely follows similar non-core data center sales in the Silicon Valley, California market to Menlo Equities, via its Prudential joint venture. Additionally, during 2021, Digital Realty has divested data centers through Digital Core REIT and a portfolio sale to Ascendas Reit.

Mary Zhang covers Data Centers for Dgtl Infra, including Equinix (NASDAQ: EQIX), Digital Realty (NYSE: DLR), CyrusOne, CoreSite Realty, QTS Realty, Switch Inc, Iron Mountain (NYSE: IRM), Cyxtera (NASDAQ: CYXT), and many more. Within Data Centers, Mary focuses on the sub-sectors of hyperscale, enterprise / colocation, cloud service providers, and edge computing.

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