CRE & Energy Development - The Inside Look with Xander Snyder - Episode 31

In this episode of The Inside Look, First American Principal CRE Economist Xander Snyder is joined by Matt Darrah, Vice President and Division Area Manager, who previously spent nearly six years helping lead and grow First American Title’s National Energy Services platform.

Drawing on Matt’s experience working with energy and infrastructure transactions, they explore powered land, data center development, behind-the-meter generation and battery storage, and how access to power and transmission infrastructure is increasingly shaping development decisions.

Hi, I’m Xander Snyder and this is First American’s Inside Look - where we explore the trends shaping the commercial real estate market today.

Today we're looking at the intersection of real estate and energy development.

So the rapid growth of data centers is creating enormous new demand for electricity at a time when access to the grid has become a major development developmental constraint.

At the same time, battery storage is rapidly emerging as a new asset class in its own right.

Joining me today is Matt Darrah, Vice President at First American, who works closely with developers involved in these types of transactions and has a front row view into how this market is evolving.

Xander, thanks for having me.

Happy to be here.

So before we get into the details of the energy market, maybe could you just first tell us briefly about your role at First American and the types of energy transactions that you typically work on?

Glad to.

So currently, I manage our national Commercial Services office in New York.

Prior to this though, for the last 5 1/2 or almost six years, I managed and helped grow our national energy services platform.

For reasons we can discuss on this call or in this podcast, I should say, energy transactions, infrastructure transactions are very different.

They get serviced in some ways differently than our core commercial and residential transactions.

So we built that office up and I'm still very closely connected to it in the work that that group does.

So that's all we focused on in my time there.

Awesome.

Well, so you have a very, very on the ground perspective of what's happening in these markets.

And I think probably it makes sense to start with data centers just because that's really kind of front of mind for everyone right now.

I mean, it's gone from a niche asset class where 10 years ago, you know, there's a handful of specialists who knew a lot about it and, and now it's front page news everywhere.

So maybe the first thing to start with is, is just power availability, which has become one of the biggest constraints for new data centers development and you're now beginning to see that spill over into some energy real estate transactions first.

So I guess my first question is what types of data center deals are coming across your desk or the energy team's desk nowadays?

So a few things.

One absolutely are just dealing with clients and customers who are focused on providing data center powered land, we call it, which are vacant development sites that are going to be entitled to get the amount of power that a data center needs.

So that's something really a transaction type that didn't exist 3-4 years ago maybe and now it's a very relevant transaction type we're dealing with.

I, I don't think it's proper to call it an asset class, but I'll defer to you on that.

Then of course we just have customers, power developer customers that are developing power or data center use and both directly and indirectly we can talk a little bit about what that means.

When we talked about behind the meter, which is another phrase that you didn't hear about a long time ago outside of the pure power space.

And now it is a big part of the data center developer world.

And then we do have power projects that are not being repositioned but are now going to have data center add-ons, is the way I think about it.

There might be excess capacity that they can shift to a data center user.

And so a data center is going to locate right next to or as close as they can to an existing power plant.

So maybe we should just dig into that phrase a little bit more.

Next, the behind the meteor ID or behind the meteor generation for someone who isn't in the energy industry, what does that mean and why has become a phrase that's so commonly used and why is it attractive to data center developers?

Sure.

So way I would explain behind the meter is if you think about the grid, the transmission network that supplies your home, your offices with power, those are all front of the meter uses.

You are taking in electricity to power those, those projects and those buildings.

Behind the meter means it's outside of that large transmission grid and it's really power that's being devoted towards one end user, one use.

Another way that we sometimes hear talked about the data center space is bring your own power.

You're not relying exclusively on the grid for the electricity needs that that project will need.

And it's a very, very for for many reasons.

It is top of mind for a lot of developers.

Now one is just concerns about grid reliability and speed to getting power available to the grid.

You know, when we think about a power project and the development timeline for a power project, regardless of who the end user will be or the end customer will be, the development life cycle for those is measured in, I think most sources that I've read say 7 to 15 years.

Of course, there are ones on the short end, there are ones on the longer end.

And why is that big?

Part of it is connecting to the grid or the interconnection process, which on its own takes 234 years sometimes depending on which transmission operator that the project is located within or within their jurisdiction.

So access to power can be deployed more quickly.

In theory, if it's behind the meter for a data center, they still will have to seek backup power and large load approval to connect to the grid.

But to be able to get power ready on day one is important to developers.

Looking at that, a data center development we're seeing take somewhere between 1 1/2 to three years.

But if you don't have power in that time period, you're not going to be able to run the data center.

Exactly.

If if power availability is one of the major constraints, then having to rely on a third party like the utility to make sure that everything's ready and up and going for your project can really be a major headwind.

So just trying to find it on your own essentially.

Right, Exactly.

I, I guess that kind of raises an interesting follow up question, which is does this suggest that access to power could potentially become more valuable for a parcel of land for data center development than the underlying real estate or the land itself?

100% And that's really the, the thesis, if you will, behind powered land, right?

It's, it's not just land that has proximity to power, it's entitled to power through the various permitting processes and interconnection processes that have to occur to deliver power to that site.

And we're seeing incredible values attributed to vacant land that has those entitlements.

You know, if you think about it, it's, it's like any other entitlement that would let you build really dense urban real estate in the middle of like Manhattan, right?

Your ability to build taller and pack more use into that lot is going to be more valuable.

The ability to pull power instantly or as instantly as the generation can be transmitted is really valuable.

So I, I know another thing that that we discussed as we were preparing for this episode was the emergence of battery storage.

And I found this really fascinating because it's, you know, I have a Tesla Powerwall on some solar.

It's cool.

Like I don't, I don't have to pay for electricity.

But I mean, battery technology has really accelerated significantly over the last five ish years.

And according to the the EIA, the the the federal government's Energy Institute, there are approximately 1.5 gigawatts of battery storage available in the US in 2020.

And that increased to 44 gigawatts by the end of 2025, which that works out to, I'll do the math for everyone.

Nearly a 30 times growth in five years, roughly doubling every year.

And that is truly exponential growth, not something you see out in the wild all the time.

So why is battery storage becoming so much more prevalent and how has it impacted your and the energy team's deal pipeline?

Yeah, it's really been interesting.

I remember very early 2021, our first order for stand alone battery energy storage system came into the pipeline and it was our first ever.

We had heard developers and clients talk about adding battery storage to a project.

So they might develop a solar project and then have a storage project associated with it or built into it.

But as a stand alone just project, our first one came over in 2021 and now stand alone battery storage projects represent a pretty significant amount of our clients pipeline and and accordingly our transactional pipeline and and they're interesting projects.

One of the things just that we're seeing is a lot of the projects that we work on are in rural areas.

But one of the great things that we're seeing on battery storage projects are they can be put in more infill cases, if you will, right, closer to urban centers.

Really the key is locating it near a transmission corridor or a substation that can dispatch power and have the battery storage system dispatch power to the grid very efficiently and quickly.

Yeah, it's really interesting, Matt And I, I think when, when it comes to real estate more broadly, if there's one major piece of wisdom that gets passed around, it's location, location, location right now, presumably that must also hold true to a degree for battery sites as it does for other types of real estate.

With renewable energy projects like wind or solar, you generally need access or proximity to some sort of natural resource, sometimes a lot of acreage.

What makes a parcel particularly attractive for a battery site?

Yeah, great question.

And the short answer is proximity to substations or transmission corridors and or generation because existing generation will also typically have that proximity.

So just as an example of that latter site specific location, we've worked with a number of customers who have existing power plants.

They might be solar.

Solar is pretty popular and they can carve A relatively small piece of land out of their overall project footprint and locate a battery storage system there next to the solar project.

The solar project of course already has transmission access and battery sites don't typically require a lot of acreage.

You can house a 100 plus MW battery project in 10 acres or less in in some areas.

So being able to find the space in an existing project's footprint to Co locate a battery system is something we see a lot of customers doing already and it makes a ton of sense.

They're not paying for new site control typically, they're not paying for new transmission corridors.

They already exist and it just makes sense to put it there.

It's dispatchable very quickly.

Alternatively, just again proximity to a transmission corridor or substation.

We worked on a number of projects that we're really proud of, but where the space to get the transmission infrastructure between the battery storage site and the substation crosses roads, highways, rivers, and that's extraordinarily expensive, not just for the work involved in doing it.

The permitting process is longer.

The entitlement process to cross all those various rights of way takes time.

So but projects get done that way all the time.

But if you could get one right next to a substation, that's a prime piece of real estate for a battery developer.

Fascinating.

So location does still very clearly matter with this new asset class and it's still true.

Yeah.

I I just found it fascinating to when we were doing research on for this episode to see how much the growth in battery capacity has been over the last several years.

I mean, it really is becoming a new asset class kind of in its own right and and flying under the radar a little bit, probably in mainstream news.

So I guess if I were to recap our conversation for today, it seems like when it comes to energy and data centers, it's not just the land increasingly it's the Land's proximity, access to power, pre entitled power transmission and and ability to to access to the grid.

Is there any other single piece of feedback or thought that that Matt, you think our viewers should walk away from today from our discussion?

Yeah, there is.

I'm going to weave in a little bit of a plug for our team, but I'll say that one of the things we're noticing is that a lot of our customers coming into the space, because it's so active, may not have familiarity with the infrastructure space.

And it's very different from core commercial real estate, right?

Just the thing that gets talked about most often is the timeline for interconnection, but also the types of issues that we deal with and our developers deal with, of course, are not the typical issues you deal with in core commercial real estate.

We're talking about vacant land, rural land that hasn't been used for anything else aside from maybe farming, maybe timber, maybe mineral development.

And so it's a whole other set of problems on the title side they face.

It is never too early to start the title for review process really and our team here in in First American IT this focused on this space.

We have lots of folks who are really experienced in looking at this and having those conversations early.

You do not want to get a surprise at the 11th hour that there is a problem that didn't come up because it's unlike any other real estate deal and and we change our processes around that.

So pick up the phone and call us if you have a question.

We're glad to talk about it.

Yeah, this is not your mom and pops, you know, 5 building multi family portfolio, right?

Really some real deep expertise is needed.

Well, thank you, Matt very much for joining us and helping sort of explain how these changes in the energy market are reshaping real estate development and and more generally the world around us physically.

And thanks to you all for watching this episode of the Inside.

Look, be sure to subscribe, stay tuned for more conversations on the trend shaping commercial real estate, and we'll see you next time.