Digital Realty is Best Performing REIT

Digital Realty Trust (DLR) is the best-performing real estate investment trust (REIT) over the last year, according to an analysis by MarketWatch. With a share price near $40, Digital Realty is up 60 percent on the year, outdistancing competitors focused on hotels and commercial properties. The next best performers were Highland Hospitality (HIH) with a gain of 56% and Eagle Hospitality (EHP) at 49%.

It's no surprise that data centers are the hottest sector in real estate investing. What's somewhat surprising, given Digital Realty's performance, is that it remains the only REIT focused on data center facilities. It's not that the thought hasn't occurred to other companies in the field. Equinix executives say the company has considered a REIT structure, and in February appointed a veteran REIT specialist to its board. But with Equinix making no immediate move to convert to REIT status, Digital Realty has the playing field to itself.

In nearly every Digital Realty earnings call, analysts inquire about the prospect of increased competition. DLR executives consistently cite the significant barriers to entry into data center real estate, a specialized market in which construction costs for enterprise-ready facilities can range from $600 to $1,200 a square foot.

Memories of the sector's "nuclear winter" of 2003-03, in which many late-arriving commercial builders and investors got burned, have given pause to some potential market entrants. But in recent months, there have been numerous announcements from commercial real estate companies planning built-to-suit or speculative projects.

"Obviously, we will have competition in the sector," Digital Realty's Chris Crosby said in a recent interview. "It's an opportunity as much as it is a threat, because we are the largest buyer of these assets. There's a lot of plans, but at this this point in time, we haven't seen too much in the way of completed projects."