IRR (Internal Rate of Return)

Internal rate of return (IRR) is the discount rate at which the net present value of a data center investment's projected cash flows — construction outlays followed by lease income — equals zero, making it the standard metric investors use to compare the time-value-adjusted returns of competing development or acquisition deals. Unlike a cap rate or yield-on-cost, which are static single-period ratios, IRR accounts for the timing of cash flows, rewarding faster prelease-up and shorter construction schedules and penalizing delays or extended vacancy. Developers typically model IRR over a hold period spanning construction plus several years of stabilized operation, then compare it against a hurdle rate set by the capital source — pension funds, infrastructure funds, or REITs — to decide whether a deal clears their required return. Because land banking, powered-shell delivery timing, and prelease commitments each shift the cash-flow schedule, IRR is highly sensitive to how quickly a project can be de-risked and leased.