A Hot Investment Before, Data Centers Can Expect More Growth Ahead

It might seem unlikely that anything good could come out of the year just passed. But, in a business sense, it was a year of validation that positioned all strategically focused businesses for a new year of growth and opportunity.

Such is the case with data centers, which entered 2020 with strong tailwinds from the nation’s growing reliance on information creation, storage and delivery. That hunger is driving growth to $200 billion this year, according to research firm Gartner.

Investors Are Taking Note of Data Center Growth Potential 

COVID-19 was, in fact, one of the many drivers of this growth, as witnessed by the nation’s increased reliance on the internet for everything from home shopping to virtual conferences that had traditionally been held in person.

The growing demand gave rise to impressive merger and acquisition (M&A) activity, such as Databank’s purchase of Zcolo assets in the US and Europe. The purchase creates what’s been called one of the largest privately held data center operators here. Also, Vantage Data Centers has purchased Hypertec’s Montreal data center campus–its third purchase last year, according to Data Center Knowledge.

Other major plays that made news last year were investment firm KKR ponying up $1 billion to create a European data center platform called Global Technical Realty, and Blackstone taking a 90 percent stake in eight centers owned by Corporate Office Properties Trust. These were powered-shell deals. More on that shortly.

Rising Investments Lift the Entire Community

Counter-cyclically, growth of this sort translates into jobs. It’s ironic as well, since data centers themselves aren’t heavily staffed. Nevertheless, in our home base of Loudoun County, VA alone, the industry is responsible for 10,000 jobs . . . and counting. This comes in addition to the ancillary community benefits, such as a billion dollars in road improvements, the addition of 18 new schools and an increase in tax revenues of 21 percent. The industry also continues to give rise to satellite operations such as cybersecurity and fiber optics, government contracting and professional services, all expanding still further the positive business and community benefits.

And that’s just in one locale. Similar stories are being replicated in data center locations around the nation. This, of course, isn’t to say that the market overall is without fluctuations. But if you picture the 2021 trajectory of data centers as a sort of hockey stick, you’ll be in line with the general consensus of market pundits.

2021 Provides Greater Opportunity for Development and Investment

That’s a strong foundation on which to build the new year. Breaking down the market still further, here are some samples of growth drivers that we can expect in 2021, as reported by Data Center Hawk:

  • Land banking is one of the growing trends among developers, with the focus on stocking up major acreage for further development, as opposed to one-off locational purchases.
  • Much as we saw with the Blackstone buys, powered shells will be a hot commodity this year. Data center operators have done a great job building a supply chain that can deliver, and users–the Amazons and Microsofts of the world–are taking notice and signing up for long-term leases stretching out sometimes as far as to 20 years. The stability for investors that such long-term creditworthy tenants bring is self-evident.
  • Enterprise demand is also sure to grow. Large corporates, such as hospitals and banks, are increasingly turning their attention to offsite centers as their needs grow beyond the confines of onsite storage. This has been accelerated by the current COVID-driven demand, and these firms are responding by moving their data needs out to new, secure locations.
  • Not all activity will be centered on major corporates and hyperscalers. A small but growing trend lives at the other end of the spectrum as providers cater to smaller users in so-called edge facilities, closer to the users’ locations and typically in mid-sized,  regional markets. The advantages here are cost and reduced latency, since more switches generally means longer lag times. (A parallel trend can be seen in the industrial market and the locational accommodations being made for last-mile delivery.)

More Trends to Watch as the Market Continues to Gain Steam

These aren’t the only trends that are securing the long-term growth trajectory of the data center industry. Development options such as prefabricated and modular designs will continue to give users choice. (For more on modular design as an option, please click here:

Stakeholders can also expect increased rack densities. As Lightreading.com explains: “To balance efficiency and costs, data centers will develop toward high density. Currently, the average power capacity in a data center is six to eight kW per rack. It is anticipated by some that power density of 15 to 20 kW per rack will predominate data centers by 2025.”

In turn, liquid cooling technologies are also gaining steam, so to speak. Again quoting Lightreading: “By fully utilizing natural cooling resources, power consumption of the cooling system will be greatly reduced.”

Market-watchers can also expect a more integrated power infrastructure in the coming years, a good thing for the sustainability mandates of institutional and private investors alike. Projects three to five years out are increasingly likely to link to the overall energy grid to reap the benefits of solar and wind power (and the incentives that come along with it).

Trends in a sector as hot as this can get as creative as developer/investor imagination will allow. With that in mind, here’s an intriguing possibility for locational options: Underground data centers in abandoned coal mines. It’s a concept that’s already getting some traction in Southwest Virginia. Could other former coal-producing regions be far behind?

More Than Operational Growth Is in the Cards 

The nuts and bolts of these facilities aren’t the only changes we should expect, and with so much investor interest in the sector, it’s little wonder that here too, enhancements will be made. For instance, there’s a growing trend in the securitization of these assets. We mentioned Vantage as one of the leaders in the M&A trend. It leads here as well:

According to Data Center Frontier, in October of last year, Vantage raised $1.3 billion in securitized notes, in part to pay down debt. “This was the first time a data center company has used securitization financing, in which a company creates a security based on the creditworthiness of a specific pool of assets, rather than the entire company,” the report stated. “In this case, Vantage was able to issue debt notes backed by cash flow from their operational data centers, which are leased by some of the world’s largest and most creditworthy companies.”

The report states that Vantage was the first. Don’t expect it to be the last.

Clearly, there’s good that came out of the 2020 pandemic. From the dual standpoints of investment and development, the rise of data centers accelerated based on national need. We at Verity Commercial are confident that that need–and therefore the interest–will only grow this year . . . and in the years to come.

For more information on how you can take advantage of the trends in data centers, contact Verity Commercial today.

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