Data Centers are Becoming the Darlings of Investors Everywhere

Posted by Instor on Apr 10, 2018 9:00:00 AM

Spring is in the air and investment fever is spreading to all data center segments. According to Gartner, global IT spending is expected to reach 3.2% for 2018 and forecasted to decrease to 2.7% for 2019 while global server shipments at 3.5% for 2018 and 4.4% for 2019. In the U.S., cloud-related demand was especially strong in Chicago, Austin-San Antonio, Texas, Northern Virginia and Northern California with 30% from user demands for cloud computing.

 

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REITs Showed Strong Growth in 2017

A recent U.S. Department of Commerce’ State of the Data Center Industry Report to the Legislature for Washington state attributes explosive data center growth due to significant economic differentiators in energy costs and net taxes. Additionally, “...data center owners have a capitalization rate of around 6.5 percent... the data center industry increasing demand for colocation capacity and services.”

Morgan Stanley reports that over the previous two years, consumers spurred the technology cycles but it has now shifted to industry’s’ demand for IT hardware. By 2021, they estimate that 44 percent of computing workloads will be in the cloud, a 23 percent jump from 2018 where each dollar of revenue growth churns three dollars in revenue decline for the legacy industries. Although the most organizations are moving toward the cloud, many others are adopting the hybrid solution where apps shift between public and private data centers.

Technical innovation is driving IT efficiencies in keeping up with demand that will include the edge data center, shift towards an all-flash solutions, converged and hyper-converged infrastructures, hybrid cloud deployment, and data center optimization with cost reductions and critical resource management all resulting in competitive advantages. Many predictions published by JLL in 2017 have proved to be on track including those projected into 2018. CBRE states that many hyperscale users focus on building out and deploying cloud infrastructure. Many hyperscale Communication Service Providers (CSP) are optimistic and speculate that the key to market responsiveness is a critical factor. Evidence of this was noted during the second (H2) half of 2017 where hyperscale cloud users returned to action with contributing more than 267 megawatts (MW) of wholesale positive net absorption in all seven major U.S. data center markets.

All aspects of building, design, business models, and scalability for growth are continuously spurring greater demand with higher expectations. Synergy Research Group reports that trends will continue to show efforts in keeping up with demands, streamlining costs, shifting workloads, and record setting mergers and acquisitions will continue well into 2018.

Investments are helping to fuel growth in multiple real estate investment trusts (REITs)  markets including data centers according to NAREIT. Many REIT sources have reported continued growth with some beating estimates in the top five markets for 2017:

  • Northern Virginia (NoVA) – most active DC market in the world with wholesale inventories larger than any European country or Asia-Pacific. 121 MW in 2017.
  • Dallas/Ft Worth – 36 MW
  • Chicago – 31 MW
  • Silicon Valley 62 MW
  • Phoenix 6 MW

During 2017, Digital Realty delivered 43 MW with 85% leased to NoVA, 12 MW with 50% delivered to Dallas/Ft Worth, 6MW with 58% delivered to Chicago – there were tight vacancies across these markets and the 2018 outlook remains bullish. All of the major U.S. metros experience greater supply volumes while balanced by high leasing activities. The expansion favors the landlords with under supplied markets, strong demand, declining vacancy, and increasing upward pricing pressure creating tighter markets.

Deloitte reports that developers compete for land and sites for primary and secondary markets. New construction was in excess of 100 MW while other hot markets averaged 40 MW. The national pricing standardization which is the pricing dictated by need and type of requirement and not geography or market location. They noted that enterprise user demands will continue with steady IT workload migration to the cloud while third party data centers and hyperscale CSP users will find substantial returns and sizeable deals.

A commentary from Cohen & Steers reports that the demand for commercial real estate will continue to exceed supply across most sectors. There will be more positive signs of earnings for the remainder of the year. The caveat showed that lagging equities and rising interest rates were to blame despite the Federal Reserves’ attempt to remain supportive in all sectors. However, growth from e-commerce was identified as factor for data centers, industrial warehouses, and cell towers.

The U.S. Data Center Trends Report from CBRE state that for the past five years, data centers were infused with $45 billion in capital investments – in fact, 2017 saw $20 billion in investments. The leading indicators included demand from multi-megawatt hyperscale cloud users with a record wholesale positive net absorption while hyperscale providers accelerated data needs.

2018 is very well on the way to shattering new records in data center investments. As space claims premium pricing and markets become tighter, many forces are at work towards staying competitive and profitable. The North American Data Centers claims that the trends will continue this year and beyond – data center development grows as providers become more comfortable with strength of sales pipeline and transparency of user expansion goals.