Navigating data center growth, repurposing opportunities, and the energy paradigm shift (2026-2030)
The digital infrastructure sector, often viewed by those involved in commercial real estate as a hyperscale commodity play dominated by remote campuses, is experiencing a fundamental shift toward the urban core. This transition centers on the rapid, low-latency demands of the last mile, driven by the convergence of advanced technologies like:
- 5G
- Internet of Things (IoT)
- Generative artificial intelligence (GenAI)
For developers and investors, this trend presents an opportunity to revitalize underperforming assets and capitalize on a market segment defined by proximity, power density, and a significant valuation premium.
Why the last mile is the next frontier
Last-mile data centers, also called Edge data centers, differ fundamentally from their massive hyperscale cousins. Defined by their location, these data centers are situated close to the activities they support to reduce latency in computation and networking. While hyperscale facilities often exceed 100 megawatts (MW) and prioritize cheap land and power in remote areas, Edge centers are decentralized and typically range between 20 and 50 MW.
The investment for the Edge isn’t one of scale but of speed. Applications that can’t tolerate significant lag between a query and its implementation are driving demand for these facilities. Critical systems where human lives or massive financial losses may depend on immediate risk analysis include applications such as:
- Autonomous vehicles
- Real-time stock trading
- Manufacturing facilities with widespread robotics dependence
The catalyst: Latency and the 5G/AI revolution
The drivers of last-mile growth include the 5G rollouts and the proliferation of AI. Future AI and machine learning (ML) applications require extremely low latency. The transition from 4G/LTE, which averages 50 to 100 milliseconds (ms) of latency, to 5G aims for a total latency of 10 ms, with transport latency reduced to 2 to 3 ms. Achieving this massive decrease in transport latency requires moving the core compute and cloud interface physically closer to the end user, which is the essence of last-mile movement. Compounding this growth? The exponential growth in data generation driven by the IoT and 5G network expansion.
Location has become a non-negotiable technical specification. Since data transmission speed is constant, Edge data center site selection has become an inherently urban and suburban CRE play, directly contrasting with the remote industrial land strategy of traditional data centers. This mandated proximity justifies higher land acquisition and development costs, translating into a valuation premium for investors.
The global data center capacity is projected to grow by 15% YOY, but this acceleration is generally deemed insufficient to meet growing demand. For the niche Edge IT infrastructure market, the growth rate is even more robust, forecast to surge from $7.2 billion in 2021 to $19.1 billion in 2026. This acute supply bottleneck underscores a critical investment opportunity, ensuring sustained tenant demand and high occupancy rates for developers who can successfully bring last-mile capacity online.
The repurposing revolution
Securing large greenfield sites with adequate power in dense metropolitan areas is nearly impossible. Consequently, adaptive reuse has become the dominant CRE strategy for entering the last-mile market. Developers are strategically incorporating Edge data centers into repurposed buildings, using underperforming or vacant office, retail, or warehouse properties. This approach offers a faster, more sustainable path to development where land for new construction is scarce.
The financial value of conversion
For owners of distressed or functionally obsolete commercial assets, the financial upside is compelling. The analysis suggests that a property successfully converted to data center use has a much higher value than one repurposed for housing. Securing data center tenants is a relatively low-risk endeavor, as occupancy often hovers near 100%.
Retrofitting sites for edge use offers a solid path for unlocking and realizing new asset value. Thanks to their durable construction and expansive layouts that can accommodate cooling systems, some investors have even considered historic buildings — although preservation requirements can present unique challenges.
The shift in site selection criteria further validates this strategy’s financial viability. The primary factor for evaluating land isn’t necessarily pricing or total acreage; instead, available power capacity and proximity to transmission lines have become the key determinants.
Three core factors offset the high cost and complexity associated with retrofitting outdated electrical and mechanical systems in commercial buildings:
- Scarcity of urban land
- Technologically mandated proximity requirement (latency)
- The high, guaranteed tenancy rates
This combination establishes a strong valuation premium that justifies the higher initial capital expenditure (CapEx) required for complex conversions.
Prioritizing power availability has also accelerated a geographic bifurcation in data center investment. Major established hubs, particularly in Frankfort, London, Amsterdam, Paris, and Dublin, are facing such significant grid strain that power connection lead times can stretch up to a decade. This scarcity is pushing capital market investment toward secondary cities with greater immediate grid capacity — a trend already manifesting in the U.S. and APAC markets. CRE professionals should prioritize the results of detailed power audits over established market dominance when evaluating potential new locations.
The power crisis
The central challenge defining the future of last-mile development isn’t so much the availability of physical space but the immediate availability of power. This “gigawatt gap” is intensifying challenges related to power transmission, grid infrastructure, and supply chain bottlenecks for critical equipment (transformers, switchgear). While developers often require megawatts within months, delivering capacity can take years, extending data center construction timelines by 24 to 72 months.
High-density demands and the cooling overhaul
A key paradox of the Edge market is power density. Though physically smaller than hyperscale facilities, Edge DCs must accommodate the same extreme heat loads generated by advanced AI workloads. High-density server racks — necessary for AI, ML, and high-performance computing (HPC) — demand between 10 and 50 kW per rack, comparable to the 20 to 50 kW/rack of new hyperfacilities.
This high-density requirement renders traditional air cooling methods obsolete. The most effective way to manage this extreme heat requires shifting to liquid cooling solutions, including:
- Direct-to-chip
- Rear-door heat exchangers
- Full immersion cooling
The existing retail or office HVAC systems found in adaptive reuse projects can’t handle this type of computing and require a comprehensive replacement with industrial-grade chillers and cooling loops. This mechanical and electrical overhaul represents a substantial (and unavoidable) CapEx cost, but it’s necessary for hosting the high-value AI workloads that drive premium asset valuation.
The energy arms race
The grid capacity mismatch has prompted operators to bypass utility delays by securing power through onsite generation. Key strategies for ensuring stable performance include investing in:
- Microgrids
- Battery energy storage systems
- Specialized infrastructure
Globally, the sector is also exploring large-scale nuclear power and small modular reactors (SMRs) as potential solutions for accommodating this growing, persistent energy demand.
Self-generation positions data centers as critical infrastructure and moves them beyond “traditional” real estate into the realm of energy management. Many see data centers as potential grid and regional assets that can offer flexible power demand, reducing consumption during peak periods of grid strain or storing and feeding back excess electricity. This evolution may open new data streams related to grid services, but it also introduces potential regulatory complexity associated with utility infrastructure operations.
While AI is the engine driving this demand, CRE investors must underwrite these assets with caution. The long-term market potential for specific generative AI applications remains nebulous, leading some analysts to suggest the presence of a market bubble in associated construction. Even large, highly publicized projects have experienced slower-than-expected starts. Underwriting must consider raw capacity demand and the commercial longevity and staying power of the tenants using those AI applications.
| Factor | Last-Mile/Edge (Colocation/Retail) | Hyperscale |
| Location Strategy | Urban/Suburban proximity (Latency-driven) | Remote/Secondary markets (Power/Land cost-driven) |
| Typical Capacity | 2 MW – 50 MW | 40 MW – 1 GW+ |
| Power Density (kW/Rack) | High (10 – 50 kW/rack for AI) | High (20 – 50 kW/rack for AI) |
| Tenant Profile | Diverse, smaller to mid-size organizations; higher churn | Cloud service giants (1-3 tenants); stable, high-credit |
| Typical Lease Term | Shorter contracts; flexibility/service agreements | Long-term (10 – 20 years); Triple Net (NNN) or Modified Gross |
| Valuation Opportunity | Adaptive reuse premium; active management yield | Stable, long-term contracted income; low volatility |
Execution and due diligence
For urban Edge development, securing the site is the first step. Next comes navigating the complex execution hurdles.
Structural and M&E challenges
Repurposed sites lack the necessary infrastructure. Existing facilities typically need serious HVAC and electrical updates. Retrofitting older facilities with modern, high-power equipment increases safety risks, such as arc flash hazards, which require specialized planning and assessment.
Zoning and community conflict
Perhaps the most significant non-technical risk is regulatory. Local zoning and land development frameworks haven’t really kept pace with data center development. Many municipal codes don’t explicitly address the asset class, leading to project approval hinging on ambiguous interpretation. It’s often classified as an industrial or utility facility. This ambiguity can lead to appeals, even after you’ve committed substantial capital. You must secure final, unappealable land use approvals before starting site work.
A related challenge in urban settings? Noise. Data centers generate a lot of noise; backup generators run at 85 to 00 dB during operation, and chillers/cooling towers produce 75 to 95 dB at peak performance. With local ordinances often restricting noise near residential zones (WHO recommends levels below 40 dB at night to prevent sleep disturbances), you must think about proactive acoustic planning. Mitigation may include enclosing all cooling equipment and backup generators and submitting detailed noise studies that model worst-case scenarios (e.g., maximum generator testing) as part of your zoning application.
CRE developers should consider power delays as a potential quantifiable capital risk, but zoning issues also present a risk. Failing to secure early compliance and manage community resistance to noise and aesthetic changes can lead to project delays and costly legal battles. Urban municipalities may impose aesthetic requirements (plantings and landscaping, different entrances) to integrate facilities into pedestrian-heavy areas. These requirements can conflict with the facility’s high-security and thermal management needs.
Operational model shift
The operational model for Edge assets differs substantially from passive hyperscale investments. Hyperscale leases typically last 10-20 years with stable, high-credit tenants. Edge or colocation centers involve shorter lease contracts, often with smaller, more diverse tenants that may have lower credit profiles and higher churn. While tenant diversity offers asset flexibility, it also necessitates a more active facilities management structure, including 24/7 staffing for security and operations.
| Risk Category | Challenge in Repurposed CRE | Impact on Project Timeline/Cost |
| Power Infrastructure | Component shortages (transformers); utility delays; lack of electrical redundancy | Potential 2–6 year delays; High CapEx for major electrical upgrades. |
| Cooling Systems | Legacy HVAC inadequate for high-density AI (10-50 kW/rack) | Mandatory M&E overhaul; High CapEx for industrial-grade liquid cooling/chillers. |
| Zoning & Land Use | Outdated ordinances; ambiguous classification leads to appeal vulnerability | Risk of project halt; legal costs for protracted permitting and appeal defense. |
| Acoustics & Community | Noise pollution (85-100 dB generators) in urban/mixed-use zones | Mandatory CapEx for noise mitigation equipment and enclosures; required complex noise studies. |
Strategic recommendations for 2026 and beyond
- Prioritize power security in underwriting. Anchor site valuation on validated capacity and a pathway for utility connection or onsite generation (BESS, microgrids) to mitigate multi-year delays.
- Mandate liquid cooling feasibility. For any adaptive reuse targeting AI or HPC workloads, include in the financial model a comprehensive CapEx required for full next-gen cooling and electrical replacement. Legacy infrastructure isn’t enough for the power Edge DCs need.
- Embed proactive regulatory risk management. Don’t treat zoning as a late-stage formality. Engage specialized land-use counsel early to secure final land-use approvals. Proactively budget for comprehensive noise attenuation measures to prevent regulatory challenges and community opposition in urban environments.
Embrace asset adaptability and active management. Recognize that Edge assets require more operational oversight than hyperscale assets thanks to higher tenant churn and security demands. Given the 20- to 30-year expected lifespan, prioritize flexibility in design and construction so assets remain resilient and can adapt to evolving, stricter environmental and energy regulations.
Are you a commercial real estate investor or seeking a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from over 90 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
