Key trends in data center growth

The mounting carbon footprint is pushing data centers toward sustainability, with edge computing expected to expand rapidly over the next decade to meet energy efficiency needs.

Against the volatile macroeconomic backdrop of the past 12 months, data centers have proven to be a highlight for real estate investors. Demand for data has surged to record levels since the pandemic as the flexible working trend remains and appetite for streaming and cloud services is holding firm, even amid the tighter financial environment.

‘Resilient’ may be a good descriptor for data centers over the past two years, but growth also shows little sign of stalling. The global co-location data center market is set to grow at a five-year compound annual growth rate of 11.3 percent through to 2026, according to services firm JLL, while the hyperscale market is projected to grow even faster, at 20 percent, as firms look to stay ahead of the demand curve.

The attractiveness of the asset class is clear from digging into last year’s dealmaking numbers. Telecoms researcher Synergy Research Group reports that private capital accounted for 91 percent of all data center deals last year, a big rise on 66 percent the year before and 55 percent in 2020. Since 2018, private capital funding has increased by an average of 50 percent year-on-year, and in 2022 surged to $44 billion. Among the largest deals is the $15 billion acquisition of global data center developer CyrusOne by managers KKR and Global Infrastructure Partners, in late 2021.

Casting ahead, the main barriers preventing further growth in major hub markets will be overcoming power shortages as well as land constraints. Today, Singapore is the world’s most constrained data center market, with CBRE estimating that the Asian city-state has less than 4MW of available capacity and a record-low vacancy rate of less than 2 percent. North Virginia tops CBRE’s global inventory ranking but faces its own looming power availability challenges. On the other hand, the trend is likely to see more growth and appetite for secondary markets such as Atlanta in North America or Berlin in Europe.

Decarbonization picks up pace

The sector’s mounting carbon footprint, regulatory pressures and power constraints are pushing data centers toward sustainability. In May, US technology research firm Gartner predicted that 75 percent of organizations will have a data center infrastructure sustainability program by 2027, up from less than 5 percent last year.

In Europe, the Corporate Sustainability Reporting Directive (CSRD) as well as the Climate Neutral Data Center Pact (CNDCP) are both ramping up ESG pressure on data center operators. The CSRD requires firms to define a transition plan to sustainable energy, while the CNDCP calls for all new data centers in the EU to have a power usage effectiveness (PUE) – an energy efficiency metric – of 1.3 in cool climates and 1.4 in warmer climes. Ultimately, the CNDCP aims to make all data centers climate neutral by 2030.

There is no doubt that sustainability regulations are positive for the industry, but these enforcements could still prove challenging for some. Last year, digital infrastructure authority Uptime Institute revealed that the average PUE for data centers was still 1.55. The same survey also pointed to a lack of industry preparation to meet these incoming sustainability requirements – 63 percent of operators said that while they expected authorities in their region to ask for environmental data over the next five years, only 37 percent currently collect and report emissions data, while just 39 percent do the same for water use.


Private capital’s share of all data center deals in 2022, per Synergy


Average yearly increase in private funding for data centers since 2018, per Synergy

Outside of Europe, other regions are similarly starting to look toward the environmental challenge. The data center moratorium in Singapore that stood between 2019 and 2022 required developers to meet decarbonization and efficiency objectives before allowing further capacity. According to JLL, 150 developers applied under a pilot program that demanded a PUE of 1.3. In the US, last year’s Inflation Reduction Act legislation extending various tax credits, as well as evolving SEC rules on climate disclosures, are also increasing incentives for greater sustainability.

Beyond simply allaying ESG pressures, firms are looking to sustainability measures because of operational incentives and financial sense. Data centers are turning to innovative new technologies to cut costs and improve energy efficiencies. Similarly, scaling and connecting to renewable energy sources improves resiliency as it protects businesses from future commodity price spikes.

The lack of available land and traditional power is forcing operators to get creative. In Singapore, local data center operator Keppel Corporation announced in late April a deal to ship up to 1,100 tons of liquid hydrogen directly from Australian oil and gas firm Woodside Energy. Liquid hydrogen will power a floating data center campus, which recently gained regulatory approval from the authorities. Future data center growth will likely depend on similar low-carbon pursuits.

Operating on the edge

The sustainability push as well as consumer demand for faster processing speeds is also spurring greater investment in edge computing. The sector was historically buoyed by demand for centralized cloud storage, but today consumers want digital infrastructure closer to the source of data.

“Applications and programs that are being developed, and which people are buying, are using more bandwidth and larger amounts of data, and that is driving the need for edge-type facilities,” explains Andrew Jay, head of EMEA data center solutions at CBRE.

“ Applications and programs that are being developed… are using more bandwidth and larger amounts of data, and that is driving the need for edge-type facilities ”

Andrew Jay

Edge computing is more sustainable partly because it frees up bandwidth on the network, but it is also typically more efficient than a centralized cloud. When the network is down, cloud users no longer have access to their data, whereas edge infrastructure provides a failsafe. This means less network traffic, less central storage and less computational power – all factors that boost sustainability efforts.

Greater edge computing will also open up a new realm of possibilities for hardware. People already interact with devices such as phones, watches and smart speakers that collect and process data, but edge computing could boost other physical network-connected hardware such as self-driving cars, autonomous robots and a whole range of other Internet of Things devices.

Roughly 10 percent of business data is produced and processed at the edge of the network today, according to JLL, but it is predicted that figure could soar to 75 percent by 2025.

By the end of the decade, business consultant Grand View Research estimates that the global edge market could grow to more than $155 billion as compound annual growth averages almost 40 percent over the next seven years.

Hyperscalers lead from the front

Edge computing should expand rapidly over the next decade to meet energy efficiency needs, but demand for hyperscale data centers is certainly not waning. Mass adoption of artificial intelligence technologies as well as strong appetite for cloud storage is projected to keep growth booming over the next five years.

There are now 314 new hyperscale sites under development and JLL expects the global total to top more than 1,000 by the end of 2024. The US is the world’s largest market, but other countries including China, India and the UK are also experiencing strong growth.

20% CAGR

Expected growth for the hyperscale data center market in the five years to 2026, per JLL research


Private capital funding for data centers in 2022, according to Synergy Research Group


Expected value of the global edge computing market by 2030, per Grand View Research

Today, global on-site data center capacity is dominated by the hyperscalers. In July, Synergy estimated that the segment accounted for 37 percent of all data center capacity, with half of that own-built and the other half leased. Synergy predicts this capacity figure could rise to over half of all data center utilization in five years, as hyperscalers continue dwarfing the rest of the competition.

Hyperscalers are also leading the sustainability trend with a jump in contracted renewable power. In 2022, real estate investment trust Digital Realty became the first data center operator to reach 1GW of sustainable capacity, with the US-based firm boasting 64 percent renewable energy coverage globally. Tech firms like Amazon, Google, Meta and Microsoft are similarly scaling wind and solar capacity to meet their data center needs.

This mix of high consumer demand and motivation for greater sustainability will likely see the asset class evolve rapidly over the coming decade. Finding the power and land to sustain growth may be the main barriers, but the sector can hardly be accused of lacking technological innovation and guile. Let’s see what the future has in store.