Are infrastructure managers better equipped to manage data centers in light of technological advancements?
Athanasios Zoulovits, InfraVia Capital Partners: Data center space is indisputably a critical physical infrastructure component of the modern data economy. There is no straight answer to this question as the sector has started maturing in a large ecosystem of providers with varying degrees of risk/reward profiles, product types, business models, geographical reach and corresponding investor bases.
Technological advancements with the exponential growth of IT outsourcing and the massive surge of new applications constitute strong tailwinds driving the unprecedented demand for data centre space globally. In addition, the technological shifts have an impact on the physical architecture and ancillary services provision, resulting in shifting patterns of customer requirements.
Infrastructure managers are, in our view, better suited to back the businesses that also manage technology risk as part of a scalable, full service, at high uptime and multi-connectivity enabled capacity offering. Real estate managers may be a more efficient source of capital to directly fund triple net lease-type lessors and provide the ‘baseload’ type capacity to wholesale users – such as the ‘hyperscalers’, where technological advancements are ignored as a result of contract duration.
Michael Hochanadel, Harrison Street: The origins of the data center industry are real estate in nature. However, as the data center market has matured, and the criticality and complexity of the underlying assets have grown, we have witnessed an influx of interest and capital from infrastructure investors. It is easy to understand why. Data center investment decisions are long-term in nature, with significant value attributed to the equipment rather than the real property.
Real estate investors that evaluate conventional basis metrics can be handicapped compared with infrastructure investors that are not as constrained by traditional metrics. But, intrinsically embedded within any data center investment is an investment in the underlying real property. As such, the binary framing of the investment approach to data centers as either one or the other is overly simplistic. The optimal approach to investing in data centers involves a synthesis of real estate and infrastructure perspectives.
Within the broad data center asset class, enormous differences exist between sub-categories, operating models and control structures. The allocation of value and the underwriting importance associated with real estate, infrastructure and enterprise value vary across these sub-categories. On the real estate end of the spectrum, consider a powered shell development opportunity leased to a single tenant on a triple net basis. Alternatively, on the infrastructure end of the spectrum, there might be a turn-key facility providing high-density compute environments. In both cases, it is critical to evaluate the assets in the context of both real estate and infrastructure.
Given the energy demands of data centers, co-location of renewable sources has been a rising trend, as has the focus on sustainability. From that perspective, who is best placed to invest in and manage these assets?
AZ: This is a topic where infrastructure managers have, in my view, more expertise and greater potential synergies to extract. Some examples from our own investments at InfraVia include NGD in the UK, where we promoted and held tripartite discussions with one of our key DC customers and a power project developer for off-grid green power solutions to diversify energy sources.
Our Swedish wind platform Treblade has entered into a long-term PPA with one of the big tech companies on 175MW of wind capacity to power one of the largest data centers in the Nordics.
“[Sustainability] is one of the main challenges for the data center industry as a whole”
InfraVia Capital Partners
Sustainability, with energy efficiency as its key first expression, is one of the main challenges for the data center industry as a whole. The decarbonization drive in Europe, the US and parts of Asia forms the cornerstone of public policy and consumer concerns – and, increasingly, consumer behavior. As a heavy electricity user, the data center industry is at the center of scrutiny. One could add to that heavy energy use the carbon-intense choice of diesel engines as the default technology for back-up power generators in data centers. Under that pressure, enterprises – and particularly big tech – increasingly seek to power their own or their suppliers’ data centers through green electrons and reduce energy intensity where possible. As a first move, we expect investment in renewables and curtailment to become a part of that sustainability play. This is very much part of infrastructure managers’ core skillset.
MH: All data centers involve some degree of power distribution, redundancy infrastructure and deep working relationships with primary utility providers. To the extent that renewable on-site generation becomes a meaningful component of the market generally, it will first occur at property scale and in service of the needs of the attendant data center.
In that context, it will be viewed similarly to other redundancy technologies, such as generators, batteries and flywheels. If on-site renewable power generation becomes economical at a campus or regional scale, platforms with expertise in both data center real estate and utility infrastructure will be better positioned to capitalize.
In terms of both infrastructure and real estate, there are two key aspects to sustainability at the data center level: composition of power generation modes and power utilization efficiency. Both can be evaluated and underwritten at the investment level, but the ability to influence these metrics is driven primarily at the property level.
“The origins of the data center industry are real estate in nature”
Michael Hochanadel, Harrison Street
Operating a property is a core competency of any best-in-class real estate platform. In the current market, a disciplined pursuit of renewable generation modes and optimal utilization efficiency is essential to competing successfully for end users. Harrison Street has been committed to these principles across all of our real estate and infrastructure asset classes through the use of advanced analytics to seek optimal efficiency for our tenants and partners.
Covid-19 has elevated data centers and digital infra in general to the status of ‘critical infrastructure’, and placed these assets under greater regulatory scrutiny. Who is better qualified to manage this regulatory risk?
AZ: It is unclear how this scrutiny may translate into legislative or regulatory moves on the data center industry, so I think it is difficult to make a clear-cut affirmation of who is best positioned. Although data itself, particularly in relation to safety and transfers, is heavily regulated, data centers remain an unregulated business. Should the temptation to regulate data center ownership as a means of ensuring data sovereignty emerge, both real estate and infrastructure investors would be equally at risk. As for other regulatory risks, managing regulatory relationships is a core competence for infrastructure investors, and I would expect InfraVia and our infrastructure peers to be well positioned in this respect.
MH: The relevant regulatory framework for data centers relates primarily to the end user and the functionality of the compute environment. This is an area that is likely to change dramatically in the coming years. The evolution and growth of cloud computing and the overlapping influence and functionality of providers present an extremely complicated market landscape against which to apply regulations. We see regulatory complexity as one attribute of many that present barriers to entry into the sector. Similarities exist in our other sectors – senior living, student housing, medical offices – and we gain comfort in the significant success we have had managing regulatory risk across sectors.
Athanasios Zoulovits is a partner at InfraVia Capital Partners
Michael Hochanadel is managing director and head of digital real estate at Harrison Street
Answers have been edited for brevity and clarity