The cutting edge in computing

For the last decade, the dominant driver of growth in the data center market has been the development of the cloud. Hyperscale cloud providers led by Google, Microsoft, Amazon and Meta have led the charge to establish ever-larger facilities. But the rise of edge computing means that the next wave of expansion is likely to be focused on a larger number of smaller and more localized data centers.

“Over the past 20 years, the data center industry has done a phenomenal job of scaling up,” says Giuliano Di Vitantonio, chief executive officer of edge data center platform AtlasEdge. “Two decades ago, a large data center was 1MW, now it is 100MW. But the next decade is about going from scaling up to scaling out.”

The definition of ‘edge’ is still the subject of debate. “It reminds me a lot of the cloud 15 years ago when it was all sorts of different things to different people,” notes Di Vitantonio. But in essence it refers to the increasing need to bring data processing and storage closer to the end user.

“The 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,” says Andrew Jay, head of EMEA data center solutions at CBRE. He cites online games where thousands of people play simultaneously around the world, and which therefore must almost eliminate ‘latency,’ the delay produced by pushing data through miles of fiber optic cable.

That is only one of a growing number of use cases for edge, however. Artificial intelligence-based applications including autonomous driving mean more processing power is needed close to where data is generated and consumed. Other technologies such as the Internet of Things, augmented reality and the 5G network are also pushing IT infrastructure outwards, closer to end users. Market intelligence firm IDC predicts that spending on hardware, software and services for edge computing solutions will increase by 13.1 percent to $208 billion in 2023 and reach nearly $317 billion in 2026.

Expanding horizons

The effect of that growth on real estate is a still-emerging picture. It is likely to generate activity in several distinct areas of the data center sector, because for different application providers the ‘edge’ of their network is located in a different place.

The largest-scale edge facilities will be those at the edge of hyperscalers’ networks. Their ‘edge nodes’ are becoming more distributed, growing outwards from existing tier-one locations like London, Frankfurt, Northern Virginia, Chicago and Tokyo. Di Vitantonio says there are already 30-40 such locations in Europe, and a similar number in the US, and predicts that the number will reach 100 over the course of the decade.

“More data center capacity is moving into the tier-two markets,” says Jeff DeBlock, managing director for CBRE Investment Management’s private infrastructure business. “In the US, that means the 30 or so largest cities, the ones that typically have major sports teams. In those markets a large data center has been up to about 8MW. Over the past two years, we are seeing 20-40MW data centers built in some of them.”

“Metro edge is where the biggest opportunities are in the edge market”

Jan Vesely
EQT Partners

In these locations, data center developers are likely serving a customer base composed of familiar names from the hyperscaler market. However, in the next size bracket down, facilities sometimes termed ‘regional’ or ‘metro’ edge are co-location data centers near smaller cities, housing server racks belonging to IT service providers keen to steal a march on rivals by offering faster, low-latency applications.

“Metro edge is where the biggest opportunities are in the edge market,” argues Jan Vesely, a partner at investment manager EQT Partners, where he focuses on digital infrastructure. In 2020, the EQT Infrastructure IV fund bought EdgeConnex, an edge data center platform that operates 26 North American facilities, as well as seven in Europe and 12 more around the world.

“Attractive metro edge markets are those with no existing data centers that can scale to meet customer need,” says Vesely. “Initially the individual facilities will be quite small, but they will eventually grow to 5-10MW or more. That market is expected to grow tenfold over the next 10 years, from hundreds of megawatts across the US, Europe and Asia-Pacific today to thousands of megawatts globally.”

EdgeConnex, which was established in 2009, was an early mover in the US. But it is now being joined by a small but growing band of European edge-focused data center operators and owners trying to capture a slice of the growing regional edge market.

AtlasEdge was formed in 2021 as a joint venture between private equity investor DigitalBridge and communications company Liberty Global. The UK-based company signaled its intention to assemble a platform of data centers to serve the European edge market by purchasing a portfolio of 12 facilities from Colt Data Centre Services in November 2021. In February this year, I Squared Capital, through its ISQ Global Infrastructure Fund III, also entered the market, kicking off its own European edge data center platform nLighten by acquiring a portfolio of buildings in Germany.

AtlasEdge is expanding both through acquiring existing facilities and building new ones. Meanwhile, in the UK, Proximity Data Centres has grown its portfolio to 10 regional edge facilities since its inception five years ago by buying up underused data centers built by large enterprises in the regional cities. The former owner usually remains in place as an anchor occupier for a co-location data center run by Proximity, says managing director John Hall. “We market space to edge users and the regional co-location market, build in unused space, increase utilization, improve the PUE (power usage effectiveness) and productivity at the sites as well.”

Edge data centers working with IoT and hybrid cloud

By providing a national platform, the company aims to be able to serve customers who want to get closer to end users around the country. “For example, we recently signed up a gaming company to put their VR gaming platform into our sites all around the UK,” says Hall. Proximity, which is backed by finance from debt fund manager ICG Real Estate, is now aiming to expand into continental Europe, initially through a portfolio acquisition, in order to meet the needs of customers – many of them US-based – who want pan-European coverage.

Close to the action

The third element of the edge computing data center opportunity will be what Di Vitantonio terms “proximity hubs,” which will bring data processing capacity as near as possible to the end users of applications. Some of that capacity will be provided within the devices themselves, but it could also be sited at the base of 5G masts, within containerized modular mini data centers, or perhaps by servers located within existing buildings.

Infrastructure and real estate investors are trying to ascertain what form that network will take, and how best to monetize the potential opportunity. AtlasEdge plans to accommodate proximity hubs by utilizing spare capacity within the technical real estate portfolio that Liberty Global already owns as a broadband and telephony provider. Di Vitantonio says AtlasEdge has access to around 1,000 locations within the UK – with 100 already well-connected to power and network cabling – that could potentially be used if there is demand nearby.

DeBlock suggests that a business model may emerge in which “last mile” edge hubs are provided through partnerships between infrastructure investors, communications companies and the owners of large national property portfolios such as industrial property companies and major retailers.

“Is there a need? Absolutely,” says DeBlock. “Is it all figured out today? No. But we will see how it plays out over the next five years.”

For investors, one of the key challenges faced in harnessing the potential of edge computing growth will be how to deploy at scale. “If an individual asset is 5MW, and probably under 50,000 square feet, that is not a lot of value or capital, and probably not very enticing for a lot of private equity players these days,” explains Jacob Albers, a specialist of data science in real estate at Cushman & Wakefield’s global think tank. “It is really a question of how they can partner with operators and developers in the space to do this programmatically.”

“Everyone is chasing after a few hyperscale tenants, which therefore tend to have a lot of bargaining power. For edge, there is a more diverse pool of tenants”

Gilles Chow
CPP Investments

Partnering with an established operator is the surest way for investors to deploy capital successfully in the sector, says EQT’s Vesely. “It is not commoditized like real estate. It is a hands-on business. You need an exceptionally strong management team to construct on time, sign contracts with new customers, and make sure there are no outages.”

For data center investors, edge can be a complementary strand alongside hyperscale cloud provision within their strategies, suggests Gilles Chow, managing director and head of real estate for North Asia at Canada-headquartered global investor CPP Investments. “An investor could look at edge data centers as part of their portfolio construction and risk profile considerations.

“In markets that are supply constrained they may be able to get better rents and returns than they would by focusing purely on the hyperscale market. Everyone is chasing after a few hyperscale tenants, so those tenants tend to have a lot of bargaining power. For edge, there is a more diverse pool of tenants and use cases.”

Because the technology involved is developing so rapidly, it is difficult for investors to gauge exactly what the real estate opportunity will be at this early stage in the evolution of edge computing. But the imperative to capture some of the economic return generated by the ever-growing demand for data will mean the sector is likely to draw close attention.