Data Center Economics & Underwriting
Data center economics revolve around a handful of metrics that translate physical capacity into financial returns — and underwriting the land is fundamentally an exercise in decomposing and pricing risk. (Figures below are general industry ranges and vary widely by market, design, and time.)
The Core Metrics
Cost per MW is the headline development metric — the all-in cost to build a megawatt of critical IT capacity, commonly in the range of roughly $7M–$15M per MW depending on tier, density, cooling, and location. Cost per rack rises as densities climb from ~10 kW toward 100 kW+. Cost per square foot is secondary, because value tracks power, not floor area — a small, ultra-dense AI hall can be worth far more than a large, low-density one. Yield on cost is stabilized NOI divided by total development cost, and the development spread is the gap between that yield and the exit cap rate — the profit of development, capitalized into value.
The Land-Basis Thesis
In a powered-land deal, controlling the dirt and the power early — at a low basis, before the market fully prices the power — is what creates the spread. The investor who secures shovel-ready powered land before the market reprices it is positioned to capture the upside as demand arrives. That is the land-basis thesis at the center of the whole opportunity.
The Six Risks Investors Price
| Risk | Core question | What mitigates it |
|---|---|---|
| Power | Can we get the MW, when, at what cost? | Existing substation/interconnection, transmission proximity, utility commitment, behind-the-meter option |
| Entitlement | Will it be approved, how fast? | Existing industrial/DC zoning, cooperative jurisdiction |
| Utility | Are rates/terms/reliability acceptable? | Clear tariff, favorable interconnection agreement, strong track record |
| Construction | On budget and on time? | Clean geotech, secured long-lead gear, available labor, defined remediation |
| Tenant | Who pays, how strong, how committed? | Investment-grade tenant, signed lease/LOI, deep demand |
| Exit | How do we monetize? | Broad buyer pool, transferable advantages, stabilized cash flow |
Power risk dominates and carries the heaviest weight — a site without a credible, near-term path to power is a speculation on getting power, not a data center site. For how those power questions are assessed, see How Much Power Does a Data Center Need? and Data Center Site Selection.
Why the Asset Class Attracts Capital
Demand (AI and cloud) is strong and growing; tenants — hyperscale cloud and AI operators — are exceptionally creditworthy; leases are long, often 10–15+ years; and supply is constrained by power. That combination produces wide development spreads and scarcity value for powered land. The very constraint that makes development hard is what makes secured power so valuable.
Frequently Asked Questions
What is cost per MW?
What is yield on cost?
What is a development spread?
How do you underwrite data center land?
Why are data centers attractive to investors?
Underwriting a data center land opportunity?
Carson Jones can help you assess the power, entitlement, and market risks behind a site. Get in touch or visit Passive Investments.
Educational information only — not legal, tax, or investment advice. Figures are general industry ranges and change frequently.
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