As war continues in Ukraine, the risk of lockdown continues to hang over China’s head, and global warming remains of paramount importance, the data center market is beginning to show signs of cracking under the strain. These global challenges have already created notable market dynamics, but it remains of principal importance that data center operators and Real Estate Investment Trusts (REITs) act now to put in place short- and long-run strategies that can help steady the ship.
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The Market Is Closely Tied to Macroeconomic Conditions
Over the past 10 years, the data center market has demonstrated sustained demand-led growth. Complementary technologies (e.g., the Internet of Things (IoT), Artificial Intelligence (AI)/Machine Learning (ML), and blockchain) have created significant demand for compute and cloud resources. But like most markets, the data center market is facing significant pressure as a result of global issues:
A new European war has not only affected Russia and Ukraine, but it has created significant supply chain issues around the world. Commodity prices have risen, putting pressure on data center construction costs, while also driving equipment costs up. In addition, energy prices have exploded, as gas & oil supplies have been cut off from European countries. This not only increases data center operational costs, but also puts additional political pressure on the industry as a whole due to its large energy footprint. It is expected that countries will increasingly become “anti-construction,” with possible new legislation, including moratoriums.
- China’s COVID-19 Lockdowns
While the rest of the world has seemingly forgotten about COVID-19, China continues to be threatened by new lockdowns. This has major ramifications for global supply chains. Many data center equipment vendors produce equipment (or parts) in China. With lockdowns slowing production, operators and Real Estate Investment Trusts (REITs) will increasingly find procurement difficult, so construction will slow down and become more expensive.
Most certainly not new, but countries are increasingly looking to introduce “net zero” policies to reduce carbon emissions. This will put additional strain on energy-intensive verticals, such as the data center market. It will be particularly bad for data center players, as public opinion continues to vilify their presence. This includes Singapore, and although it has cancelled its data center moratorium, it has put in place stringent data center requirements. Countries will increasingly become “more selective,” which will drive data center construction and operational costs, while slowing proliferation.
Global Events Are Having a Very Tangible Impact on Market Trends
Global events continue to create structural changes across economies with profound long-run effects on the data center market. But how has the market responded so far?
- Longer Construction Lead Times
Obviously, supply side constraints impact construction and operations. This impact has not been limited to Russia, where Rostelecom has cited equipment supplies as the reason it has stopped data center construction, but globally, construction lead times have increased from 12 to 18 months to up to 2 years. This is likely to have a significant knock-on effect, increasing colocation and public cloud costs, leading to a general digital transformation slowdown across the board.
- More Aggressive Mergers and Acquisitions
To counteract growing lead times, capital-heavy players are looking toward Mergers and Acquisitions (M&A) to continue to drive global reach. This is reflected in the interest from institutional investors, as they look to commit capital to the market (including KKR and Global Infrastructure Partners acquiring CyrusOne for $15 billion). On top of this, investors have not shied away from committing additional funding/incremental investment to support construction/operations. This reflects the potential of the market; although there may be supply-side constraints, the long-term outlook looks sound.
- Expansion of “Green” Research and Development
As a result of global warming pressures, there has been significant Research and Development (R&D) activity across data center equipment vendors (e.g., Huawei). Huawei’s “green data center” and the subsequent marketing/press coverage is representative of the importance that this will play in the data center market going forward. Increasingly, we have seen Power Usage Efficiency (PUE) as publicized above size or even capacity.
Market Players Must Not Be Reactive, but Develop Long-Run Strategies
Traditionally, this market lacks significant innovation or agility, but in the face of adverse macroeconomic factors, it is critical to act now and put both short- and long-run strategies in place. Below, ABI Research sets out key strategies that operators and REITs must engage with to limit the shock:
- Reassess Ongoing Construction Projects: Ensure that projects will meet increasingly stringent sustainability requirements, while ensuring that costs will not spiral out of control, given commodity inflation.
- Limit Panic Buying: Given the inflation of resource prices, construction companies could be tempted to “panic buy” commodities to facilitate data center construction. However, the cost implications of over-buying and the requirement for customized equipment mean that this is likely to only inflate already growing costs.
- Optimize Data Center Operational Efficiency: Optimizing current data center facilities usage will help manage increasing energy prices and provide open facilities for new customers.
- Accelerate Data Center Modernization (AI, Sustainability): As with most external stimuli, innovation is often key to agilely shifting business/operating models to meet new demands. In terms of global warming, operators and REITs must look to transform their processes (construction and operation) to minimize carbon emissions, which means using new modular “green” data centers, introducing low-carbon energy sources, and incorporating AI within operations. This will not only reduce costs, but can improve global competitiveness by making sustainability part of a go-to-market strategy.
- Develop and Deploy or Acquire Disaggregated Data Centers: Long-run energy crises may undermine the growth of mega data centers, so 4 Megawatt (MW) to 10 MW data centers will become like gold dust. ABI Research believes that acquiring smaller data centers will be a prudent strategy for the bigger players.
- Work to Reshore Data Center Equipment Production: Supply chain woes are unlikely to ease up in the short run and given the current geo-political tensions, they are likely to become worse. Reshoring equipment production will ease up supply chain constraints, but given Intel’s challenges in the United States, it may not solve all problems.
ABI Research believes that it is vital that operators/REITs recognize that these global shocks will be structural, not transitory, and will create a new business environment. This change must be met with well-thought-out long-run strategies that place innovation at their core to drive long-run value generation. From the hyperscaler’s perspective, their skills will be in high demand and they are likely to see public cloud uptake. But they must be careful given that they could become public enemy number one due to their carbon emissions and energy usage. Mitigating this by highlighting their sustainability efforts throughout their go-to-market messaging will be crucial.