Macquarie on enabling the digital frontier

Huge absorption figures shine a spotlight on the world’s increasing dependence on data centers, observes Erin Ledger-Beaupre.

This article is sponsored by Macquarie Asset Management 

Erin Ledger-Beaupre

Global demand for data may have been insatiable even before the pandemic, but today there can be little doubt that appetite for gigabytes is only growing. Last year, the data center sector enjoyed a second consecutive year of record mega-deals as absorption in core markets hit new heights and real estate investors scrambled to add assets to their portfolio.

But while the upward trajectory of data centers may be patently clear and positive, there are also looming headwinds. Accessing new landsites in key markets is becoming more competitive, while data centers are not immune from labor and supply-chain disruptions.

Equally, the sector’s mounting carbon footprint cannot be ignored. Erin Ledger-Beaupre, senior managing director at Macquarie Asset Management, shares her thoughts on these themes and sets out the leading factors attracting capital to the asset class.

Which data center markets are currently attracting the most interest?

On the real estate side we are focused on tier-one and tier-two data center markets in North America, Europe and Asia-Pacific. We have really been focused on accessing the data center market through a global lens, and that includes all the major markets.

In the US, the largest market is Ashburn, Virginia. In Europe, the main markets are Frankfurt, London, Amsterdam and Paris. And then in Asia-Pacific, you have Australia, Singapore, Japan and Hong Kong as the core tier-one markets. As we continue to expand, the more emerging markets become an interesting location for data center exposure as well.

Over the past five plus years, smaller regional operators are becoming consolidated into the larger global operators and desire to expand across multiple key locations is continuing to grow.

What are the capital demands of the data center sector?

If you think about the largest tenants in the data center industry now relative to 15 years ago, it is largely comprised of the large hyperscale tenants. Those types of groups are driving the industry, and they account for a massive amount of the leasing that is happening.

Our world has become much more digitalized. Things like video conferencing and virtual schooling existed three years ago, pre-covid, but they weren’t used on the basis that we are all using them today.

And that doesn’t even touch AI or mass use of driverless cars, for example. All these things are creating demand for data creation. Something like 90 percent of the world’s data has been created in the last two years.

There are massive requirements from the underlying users for larger footprints across broader geographic regions, both in places closer to population centers and in very highly cost-efficient power locations. If we look at the capital side, data centers are extremely expensive to build, typically $6 million-$10 million a megawatt.

We have seen a large influx of capital into the sector from institutional investors. A report from CBRE said that 31 percent of their investors wanted to invest in data centers today versus 2 percent in 2018. According to a recent Research and Markets report, there is a projected 65 percent increase in capital investment from 2021-25 across the private equity landscape to $13 billion-$15 billion on an annual basis.

What is your view on the projected boom in edge computing and the potential impact on traditional data center operating models?

When you think about the edge, there are data center needs that are going to have to be close to eyeballs and the speed component is very important to that. But emails that are being stored from five years ago, those can go sit somewhere more remote and we don’t need to have access to them instantaneously. It is very much going to continue to be this hub-and-spoke approach where there is demand on a wide spectrum.

How is availability of landsites in key data center markets impacting the growth of the sector?

Access to land that you can get power into is probably the biggest consideration, because what are you going to do if there is no access to energy? It is all about being creative.

At a project in Amsterdam, we are investing into power transmission to bring the power from relatively far upstream, relying on a different power source.

The challenge is that footprints are getting larger and data centers themselves are getting larger in size and scale. The desire for campus style builds is very strong, and many tenants like to have the ability to see a pathway toward adding more capacity. That requires sometimes moving outside of what would be a traditional data center zone.

What measures are being taken to green data center emissions and increase energy efficiency? Can data centers ever be green?

Data centers are obviously large users of power, but many are very energy efficient today. There has also been a much greater focus on water usage in addition to electricity.

There is a growing number of new approaches to cooling that reduce energy consumption. Some operators use air-chilled coolers, others use closed loop systems where water is continually recycled.

There are a few other types of cooling mechanisms evolving that take liquid directly to the rack and chip itself, which provides more efficiency. We are even seeing waterless cooling technology, which is suitable for regions that are prone to drought.

“Access to land that you can get power into is probably the biggest consideration”

The biggest challenge is the power that is used by the underlying tenants. How do we create a smaller carbon footprint? A big piece of that is going to be access to renewable energy, and a number of the grids – particularly in Europe – already provide access to an increasing renewable energy mix.

As an industry, we need to make it a priority to advance the use of renewable energy. We are seeing power purchase agreements being used across access to renewable energy and alternative biofuels use. At Macquarie, we realize we can be part of the solution to help transform this industry.

We can utilize the resources and expertise we have to become more sustainable. And we can leverage our renewable energy experiences to really help push the industry forward.

How do you see the scaling of 5G affecting the data center structure?

5G continues to drive this insatiable demand that we humans have for faster and more connected data. Our expectations and the efficiency in the underlying data usage continue to grow, making data centers essential.

“It is still a niche asset class. From a real estate perspective, there aren’t hundreds of operators”

Take the classic example of an airline that has an outage at its data center and grounds all their planes across the world. You don’t think about the impact until something like that happens, and the airline can’t function.

This reliance will just continue to expand as data centers become more efficient and more data is created globally. The requirement for increasing density within the same footprint is continuing to grow.

What are some of the main challenges to investing in data centers?

It is still a niche asset class. From a real estate perspective, there aren’t hundreds of operators. Ultimately, if I own an apartment building there are a lot of different apartment operators who can manage the assets, whereas the operator in a data center becomes much more fundamental. The uptime performance of the operator is critical to tenant satisfaction and demand for more space.

A big challenge for many real estate investors in this space is finding access to a good operator; one that has a track record, the capabilities and the skillset, and knows the tenants.

If I am an enterprise and deciding where I am going to put my data center capacity, and with which operator, it is a decision that is so crucial to my business that I am going to go with the operator that is tried and tested. It is a very specialized skill set, and if you are an operator creating a new platform you need to have access to large amounts of capital.

Another issue for data centers is talent; the industry needs to take a better approach to recruitment. People don’t necessarily go to university thinking “I am going to go operate a data center”;  historically it hasn’t been something that crossed many people’s minds.

How do we as an industry broaden and create greater knowledge that this is a profession that is critically important?

Supply-chain disruptions also require navigating. We are accelerating purchases on some of the core equipment because that is really where there are challenges in the supply chain.

Time to delivery is very important, and everyone has accelerated purchases of key equipment.

That is where I think we are continuing to see some slowdown, so we are taking decisions now to be able to deliver the product on time and on schedule.