Real Estate

Cloud REITs gaining ground

REITs of the cloud
REITs of the cloud

From music to e-books to email, more and more of the data produced today is stored in the cloud. The cloud, however, does not live in the sky. It lives in data centers spread out across the nation, and as data booms, so too, does the value of the real estate that houses it and the real estate investment trusts, or REITs, that own those properties.

"It is phenomenal growth, and it's the conflux of two things that are going on," said Gary Wojtaszek, CEO of CyrusOne, a data center REIT. "We're structured as a real estate investment trust, so we're predominantly just a real estate company, but we're a derivative of what's going on with all the growth in the technology space. So everything you hear about Google and Netflix and RackSpace and Amazon and all of those new technologies that are going on, ultimately reside in a data center."

CyrusOne data center in Sterling, Virginia
Stephanie Dhue | CNBC

In Sterling, Virginia, in a large nondescript office park, CyrusOne is housing much of the computer hardware and data that its customers need to run their businesses.

"Our focus is serving the needs of the Fortune 1000 that comprises about 75 percent of our business, including nine of the Fortune 20. So these are the largest companies in the world that have chosen to store their computers in our data centers," said Wojtaszek.

Some companies build or buy their own data centers. Facebook recently announced plans to invest half a billion dollars in a new data center in Fort Worth, Texas, its fifth center worldwide.

Read MoreFacebook to build $500M data center in Texas

There are two types of data centers, one that serves as a power station for the technology and one as an Internet hub where tenants can exchange data. The former is usually located out in the suburbs, the latter in major metropolitan areas. The Internet hubs, which are network dense, are more valuable because they are difficult to replicate; they are therefore more attractive to the investor over the long term.

There are currently five REITs specializing in data centers. Most are outperforming the broader REIT market.

CyrusOne is up 18 percent from a year ago. Coresite is up 45 percent. Others include Digital Realty, Equinix and QTS Realty Trust.

"There are opportunities in the data center space for investors who really dig in and put in that effort because the securities are arguably less efficiently priced," said John Bejjani, a REIT analyst with Green Street Advisors.

Data centers are unique because they are at the crossroads of tech and real estate, and the valuation approach that investors use for each are quite different.

Read MoreRates hit REITs: Should you dump them?

"Because data centers are subject to all this potential technology risk, because there's so much more to understanding the sector than simply knowing where the real estate is located, and because the data availability is not nearly as great as it is for other property types, some investors opt not to take on the brain damage of understanding these various risks," added Bejjani.

The potential for growth, however, is phenomenal.

'If you take all the data that exists in the world today, 90 percent of it was created in the last two years. It's going to double again in the next 18 months, and if you think about it in the form of iPads, and you think about that data, so if you take a stack of iPads and you put one on top of another, it will go from here to two-thirds of the way to the moon. By 2020, that stack of iPads is going to go back and forth five times from the moon and back," said Wojtaszek.

Analysts warn, however, that demand is still difficult to forecast in the sector, both by tenants and landlords. The danger, therefore, is that there may be too much speculative development and a potential for oversupply. New technology is always around the corner, and so the data center on the corner of wherever must always be ready to adapt to it.