Data Center Investment: An Evolving Landscape

Published October 23, 2019 | 4 min read

Data center investment sits at the intersection of several sectors – communications, infrastructure and real estate – generating interest from a wide range of investors given the potential to realize significant long-term returns. At RBC's Global Data Center & Connectivity Investor Day, the industry was focused on geographic expansion, exploding data demand and how investors can analyze risk and reward in this growing sector.

Data centers are an exciting new vehicle for a growing number of investors, bringing together the stability of infrastructure investment with the rapid growth of the communications industry. As data demand explodes, fueled by advances in hyperscale and Edge technologies, the advent of 5G and growth in the Internet of Things, the market is evolving.

Panelists at the RBC Capital Markets Global Data Center & Connectivity Investor Day foresee some key changes ahead, as both the geography and appetite of data consumers develops.

Data demand goes global

 

While the US is in many ways the first market for data centers, investors and the industry are widening their viewpoint, with strong growth expected across all markets, especially in EMEA and Asia. Industry experts used India and China to illustrate the rapid scaling of global data demand.

While still in its infancy – and despite its geographical challenges – India has started to see some large-scale take-up, said Kris Kumar, Chief Executive Officer, Bridge Data Centre. Kumar pointed out that demand has grown from three or four megawatts a year about four years ago to around 25 or 30 a year today – a figure that would increase dramatically as some of India’s hyperscalers take ground.

As for China, Kumar also cited the “insane” level of demand in the market. Dan Newman, Chief Financial Officer, GDS Holdings Limited, said that new business in China from five tier one markets last year was 180MW – the equivalent of the growth of the entire European colocation market.

South America is also opening up to the industry, with Brazil cited as a huge hyperscale market, and Australia, which was an early cloud adopter, still enticing investment on second and third iterations of projects.

Hyperscale grows to superscale

 

The big players in hyperscale – Amazon, Microsoft, Google – have matured and new webscale companies are climbing the hyperscale ladder, creating new deals for the industry.

Randy Brouckman, Chief Executive Officer, EdgeConneX highlighted “an entire cast of webscale companies beyond the public cloud providers that are reaching levels of scale, super scale and hyperscale that six years ago would have been the biggest deals anyone in the room had seen”

The maturity in large hyperscalers is also making the market more stable for providers and investors. Dan Newman said that in China, for example, there are 10-15 names in the hyperscale market that account for 80% or more of incremental demand. “They have pretty good visibility in terms of their own requirement and when they contract with us, it’s a pre-commitment for delivery one year down the road. That’s the visibility they have in their own business – it wasn’t the case a few years ago, but it is now,” he said.

Location, location, location

 

While data demand grows across the globe, there is also a focus on location, latency and looking for data in the right place, with more and more applications being optimized for location. However, not all applications have the same performance and latency requirements.

Giuliano Di Vitantonio, Chief Marketing and Strategy Officer, InterXion Holding N.V, shared his view that hyperscalers are becoming increasingly sophisticated in understanding “what deployments need to be put where.”

Di Vitantonio explained that when it comes to querying a database, “you probably don't want to have a round trip of 100 milliseconds.” There are more and more deployments that are getting closer and closer to the network connections and these network roles and compute roles are becoming more and more co-located. “The network architecture is becoming a much bigger factor than it was two or three years ago because there's also a big cost associated with the network component of running a cloud,” he explained.

Risks and rewards

 

When it comes to investment, funds need to assess risk carefully, according to the experts. Every data center investment is not created equally. There are different risks and therefore, different returns and timescales, whether funds are looking at a long-term hyperscale investment or managed services, for example.

Mark Prybutok, Managing Director, GI Partners, cited the challenge today from an investment or acquisition stand-point is that some infrastructure investors may not be appropriately assessing and underwriting the risk that exists around communication infrastructure, specifically data centers.

“Previously, communications infrastructure investments involved funding for towers or fiber networks, which were location-specific and couldn’t really be replicated. But data centers are different,” said Prybutok.

With the exception of interconnection hubs, these data centers are comparable to traditional real estate investments. But for a lot of data center investments it is not the physical structure which drives differentiation. Where traditional infrastructure investors sometimes get a bit stuck is the nuance in different types of data center assets. “What's the real impediment to customers switching if a market gets over-built, what's the impact on pricing and so forth” he said.

When investors back a hyperscale land deal with a very long-term customer contract, it’s quite different to a data center with a focus on small enterprises, interconnection or managed services. Although there’s money to be made in all types of data center deals, investors need to know their ‘apples’ from their ‘oranges’.

Jon Mauck, Managing Director, Digital Colony said “there is this movement now where data centers feel very real estate or infrastructure-like because of hyperscale demand. But we also think there  is potential value to be made across the entire spectrum if you think about the risk return correctly and the execution risk, because in some cases it looks a lot more like a technology services company than it does an infrastructure real estate company”.

Looking to the future

 

That link with the technology sector is also going to drive how rapidly data centers change. Most of the experts dismissed worries about technological obsolescence as just a matter of making sure that the facilities receive the investment they need over time. But watching what’s happening in the tech sector is vital in understanding how data demands will shift.

Dan Newman thought that 5G and AI could both be demand multipliers “especially with the emergence of a whole new category of companies around AI with incredibly intensive data and IT demands.”

Mary Meduski, President and Chief Financial Officer, TierPoint, pointed to the “huge momentum” in hybrid cloud and companion managed services and to the “very strong trajectory going forward” in industry forecasts. In fact, 60% of Tierpoint’s bookings are in cloud and managed services, and rising.

Meduski said that in their tier two markets, “opportunity comes from over-the-top and telephone providers to create communities of interest in those markets, bringing more diverse connectivity options with enhanced bandwidth and lower latency.” But it's not just a hyperscale opportunity, she says.

“Our enterprise class customers are consuming more and more data, which means they need more and more computing – and storage – capacity on the Edge. And they want low latency connections across their footprint.”

All of these factors are already in play. The global growth opportunity for data centers looks primed to go superscale.

5GCommunications InfrastructureData CentersHyperscale