One formula turns a kW-month rent into a price per MW. The harder question is which MW the price is divided by.
A data centre's value per MW is its net operating income per MW of contracted IT capacity divided by a cap rate: rent per kW per month times 12,000, times the NOI margin, over the yield. Halvard DC1 earns $1.587 million of NOI per MW, so at the 5.50 per cent market cap rate the book assumes it is worth $28.85 million per MW, a little above the $28.1 million per MW its buyer pays. At the 6.25 per cent yield the case applies after the lease renews, the same income is worth $25.39 million per MW: the cap rate, and the MW you divide by, are where the analysis is.
Worked in full in The Digital Infrastructure Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Halvard DC1 is the fictional hyperscale data centre of The Digital Infrastructure Investor: 32 MW of IT capacity leased to one cloud provider, with a 16 MW second phase waiting for its grid connection. Amounts are in US dollars.
| Item | Value |
|---|---|
| Contracted IT capacity | 32 MW |
| Capacity rent | $138.00 per kW per month |
| Capacity rent, year 1 | $52.99m |
| NOI, year 1 (after operations, management, plus the energy margin) | $50.78m |
| Purchase price | $900m |
| Market cap rate for direct capitalisation (assumption) | 5.50% |
| Exit cap rate, lease renewed | 6.25% |
| Actual PUE | 1.40 |
| Phase 2: capacity and cost to build | 16 MW at $10.5m per MW |
The NOI is 95.83 per cent of capacity rent. That is high for real estate and normal for a single-tenant wholesale lease: the tenant pays for power, the landlord's operating costs are small, and here the margin the landlord earns on passing power through partly offsets them.
Rent per MW-year = rent per kW per month × 1,000 kW × 12 months
= $138.00 × 12,000 = $1.656m
NOI per MW = NOI / IT MW = $50.78m / 32 = $1.587m
Excel: =Rent_kW_month*12000*NOI_margin/1e6
The factor of 12,000 is the step most often dropped. A kW-month quote of $138.00 looks small beside a price of tens of millions per MW until it is turned into a MW-year.
Value per MW = NOI per MW / cap rate
= $1.587m / 5.50% = $28.85m per MW, or $923.3m for the 32 MW
At the 6.25% renewal exit yield: $1.587m / 6.25% = $25.39m per MW, or $812.5m
Price per MW paid = $900m / 32 = $28.1m; implied entry yield = $50.78m / $900m = 5.64%
At the market cap rate the in-place income supports $923.3m, so the $900m price looks covered with $23.3m to spare, and the entry yield of 5.64 per cent sits just above 5.50 per cent. Move to the 6.25 per cent yield the case applies to the building once its lease has renewed and the same income supports only $812.5m, $87.5m below the price, $2.73m per MW. To justify the full price on today's income at 6.25 per cent, rent would have to be $152.85 per kW per month. Which yield is right depends on what the in-place NOI does not show: the pre-leased second phase, the 2 per cent escalator, and whether the lease, with eight years left, renews on good terms. A 75 basis point choice of cap rate moves the answer by $110.8m.
Price per MW is quoted on three different denominators, and the same building gives three different answers.
| Denominator | MW | Dollars | $m per MW |
|---|---|---|---|
| Contracted IT capacity, phase 1 | 32 | 900 | 28.12 |
| Grid power, phase 1 (IT MW × PUE 1.40) | 44.8 | 900 | 20.09 |
| IT capacity built out, phases 1 and 2, price plus build cost | 48 | 1,068 | 22.25 |
A broker comparing Halvard at $20.09m per grid MW with a peer at $25m per IT MW would call Halvard cheap when it is not. The convention to hold to is IT MW, because that is what the tenant rents and what the rent is quoted on. For a campus with unbuilt phases, add the remaining build cost to the numerator before dividing by the finished capacity: phase 2 costs $168m at $10.5m per MW, which takes the all-in figure to $22.25m on 48 MW.
With the NOI margin held at 95.83 per cent, value per MW is linear in rent and inverse in the cap rate.
| Rent, $/kW/month | Cap 5.50% | Cap 6.25% | Cap 7.00% | Yield at $900m |
|---|---|---|---|---|
| 120 | 25.09 | 22.08 | 19.71 | 4.91% |
| 138 | 28.85 | 25.39 | 22.67 | 5.64% |
| 152 | 31.78 | 27.97 | 24.97 | 6.22% |
| 168 | 35.13 | 30.91 | 27.60 | 6.87% |
Seventy-five basis points of cap rate is worth about as much as $19 of rent: $138.00 at 5.50 per cent and $152 at 6.25 per cent land within $1m per MW of each other. A buyer who underwrites both a rent uplift at renewal and a tighter exit yield is counting the same optimism twice.
The cap rates in the table are illustrative, not market evidence. A single-tenant lease with eight years left and a building whose cooling may not suit the next chip generation is not the same asset as one with fifteen years left. A per-MW multiple carries no information about either.
Treating price per MW as a valuation method rather than a check. It ignores the remaining lease term, the rent against market, who pays for power and the PUE the building actually runs at. Two buildings at the same $28.1m per MW can hold leases of three years and fifteen. The figure is useful only after a discounted cash flow has been run, to ask whether the answer sits in a sensible range. How much of Halvard's price the signed lease alone pays back is worked in how much of a data centre's price the lease covers, and the power margin inside its NOI in how a data centre makes money on power pass-through.
The three valuation methods the book sets side by side, with every input live, are in the free workbook for this case.
Wholesale rents and most transaction comparisons are quoted per MW of critical IT capacity. Dividing by grid power, which is IT load times the PUE, gives a lower figure: a $900m building with 32 MW of IT capacity and a PUE of 1.40 is $28.12m per IT MW but $20.09m per grid MW. Comparing the two conventions makes a building look cheap when it is not.
Entry yield is year-1 NOI over price. In the illustrative Halvard case, $50.78m of NOI on a $900m price is 5.64 per cent, just above the 5.50 per cent market cap rate the book assumes, so the price sits below the $923.3m direct capitalisation value. At the 6.25 per cent yield the case applies after the lease renews, rent would need to be $152.85 per kW per month instead of $138.00 to support the price.
At $138 per kW per month and a 95.83 per cent NOI margin, value per MW is $28.85m at 5.50 per cent, $25.39m at 6.25 per cent and $22.67m at 7.00 per cent. A 75 basis point move is worth roughly the same as a $19 per kW per month change in rent.
This article is one calculation from The Digital Infrastructure Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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