Investment Analysis

Big Data, Major Demand

Considering the continued growth of big tech, data centers will be a CRE sector to monitor.

When it comes to site selection for data centers, the hyperscale data center segment has developed into both the largest mission-critical real estate category and a key sector designed to meet the exponential demands of modern IT systems. As the name implies, “hyper” refers to ultra-fast computing while “scale” allows for the quick expansion of ever-growing networks.

The resulting speed-to-market ecosystem of data center technology, speed, and efficiency allows for millions of us as consumers to take for granted how quickly our phones and computers operate every day. Couple this framework with the dramatic outsourcing to the cloud by businesses — saving significant capital in the process — and the hyperscale market should expect significant growth globally for many years to come. While there is no standard definition of a hyperscale data center, the following will provide some of its importance to commercial real estate.

How Big Is Big for These Hyperscale Developments?

Think about the massive million-plus-sf shipping and e-commerce logistics centers in the industrial sector of CRE. These same economies of scale can be applied to the hyperscale data center sector by firms like Facebook, Google, and Amazon Web Services. Many hyperscale developments can exceed 2 million sf and house thousands of servers in long rows of racks on raised floor environments that provide critical power and cooling to ensure maximum efficiency.

The resulting speed-to-market ecosystem of data center technology, speed, and efficiency allows consumers to take for granted how quickly our phones and computers operate every day.

The critical power load for many of these hyperscale facilities easily surpasses 10 megawatts, and some sites are designed to exceed 100 megawatts. Along with all the servers, sites have to provide substantial cooling, connectivity, and redundancy to ensure no downtime or disruption. If one megawatt can power roughly 750 residences, then a single data center can easily surpass the power needs of 75,000 homes.

As expected, the capital costs related to these massive data center campuses are breathtaking. One hyperscale data center campus can typically start at a $500 million budget for its initial phases, growing to over $1 billion in capital expenditures once fully developed. As an example, Facebook's 2-million-sf campus is in its final phases and will exceed $1.5 billion in dedicated infrastructure — and the social media behemoth will have dozens more across the globe.

The global cloud and social media giants are the major customers and developers. Just three of them — Google, Amazon (including AWS) and Microsoft (including Azure) — comprise 50 percent of the total market. Other hubs of the internet — including Facebook, IBM, Oracle, and Apple — also have notable hyperscale infrastructure in place in the U.S. and globally. Alibaba, Twitter, and Baidu are also big players.

Here's a look at the breadth of these projects across the U.S.:

Google — Council Bluffs, Iowa: Since 2007, Google has expanded this facility to over 2 million sf and over 100 megawatts power capacity, having invested more than $2.5 billion to date.

Apple — Sparks, Nev.: This 100 percent renewable energy hyperscale site totals 1.08 million sf across three buildings on 1,700 acres, with a to-date price tag of $2 billion.

Microsoft — San Antonio (two campuses): After completing its half-million-sf Westover Hills campus, Microsoft secured its Texas Research Park campus projected to exceed 160 MWs of power and over 1.5 million sf.

Several wholesale colocation operators and data center developers are also providing hyperscale cloud environments catering to both these top-tier giants along with other cloud users needing large scale and flexible deployments. These cloud users — many in the e-commerce, gaming, 5G technology, artificial intelligence, and software-as-a-service arenas — include such recognizable names as Dropbox, Netflix, Zoom, VMWare, Nvidia, and eBay. These customers tend to lease large megawatt blocks of critical load (the measuring stick for data centers instead of square footage) in chunks of 5-10 MWs, sometimes 30 MWs or more. To meet this demand, these U.S. wholesale colocation and developer groups include:

  • Developers: Digital Realty has nearly 300 facilities across 20 countries.
  • Wholesale Colocation: CyrusOne, Switch, Iron Mountain, and QTS Data Centers all provide intensely reliable facilities across their targeted geographies, and they all have most of these cloud and social media titans in their sights.

According to recent data from the Synergy Research Group, which provides market intelligence and analytics for the networking and telecom industry:

  • The total number of large data centers operated by hyperscale providers increased to 597 by the end of 2020, having more than doubled over the past five years. Even during COVID-19, 52 hyperscale developments came online in 2020.
  • The U.S. continues to account for almost 40 percent of the major cloud and internet data center sites.
  • Amazon and Google opened the most data centers in the last 12 months, accounting for half of the 2020 additions.
  • Synergy noted roughly 220 more such facilities either planned or already under construction.

While the capital costs remain daunting — Synergy Research estimated that it spent almost $100 billion in the first three quarters of 2020 alone — hyperscale data centers represent a robust niche within the commercial real estate market. Considering the growing demand for global cloud and social media corporations, major firms will continue to spend billions of dollars annually to meet consumer and business demands. The hyperscale approach provides operating efficiencies and scalability required by enterprises for their IT networks. Given that the hyperscalers were well-positioned in 2020 during the coronavirus pandemic, the footprint across the globe for these facilities is projected to remain strong for the next three years and beyond.

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