Capital flows to data center sector as demand blossoms

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August 20, 2018

By Raul Saavedra, Executive Vice President, JLL

In a recent blog, I discussed development and construction activity in the data center market. With some observers projecting that US data center customers will need as much as 100,000MW of new capacity by 2020, I want to dig a little deeper into the demand cycle and what this means for the leasing market as well as capital markets.

There’s no doubt that there is a deepening pool of demand for data centers. Cisco’s Visual Networking Index predicts annual global IP traffic will reach 3.3 zettabytes by 2021.  That’s almost three times the traffic experienced in 2016. (For those of you interested, one zettabyte of data is enough to fill 1,000 average data centers, and those data centers would take up 20 percent of the land mass of Manhattan.) 

Cloud demand

It’s not hard to see why demand is skyrocketing. A recent survey by KPMG suggests that seventy percent of companies are making significant or moderate investments in cloud and a report by Gartner projects the expected global spend of public cloud services this year to be around $186 billion.

It’s clearly no longer just telecom users driving the market.  Today, there is a broad universe of users from telecoms to web services and even artificial intelligence.

One of the most surprising growth drivers for data centers in the last two years has been cryptocurrency.  It’s a segment of the market that isn’t quite ten years old but because of the rise of Bitcoin, is rapidly developing its own infrastructure. Earlier this year, a company billing itself as the world’s first full-stack cryptocurrency ecosystem opened an 84MW cryptocurrency mining facility – a.k.a. data center – in Virginia Beach, VA.

The demand for rack space is at a fever pitch and, as technologies like AI and digital currencies develop, so does the need for more sophisticated DC’s with heavier power loads and super-efficient cooling systems.

Silicon Valley matures, operators eye other markets

This, in turn, is prompting users to increasingly embrace new markets for their data center operations, though Santa Clara is still Ground Zero for many.  After all, Silicon Valley is where it all started and, as Vantage Data Centers has recently shown, there is still quite robust demand.

Yet, like any mature market, demand in Silicon Valley is stable and consistent rather than in strong growth mode. Instead, leasing velocity is trending toward markets such as Northern Virginia and Chicago, where developable land is more plentiful, and strategic secondary and tertiary locations such as Virginia Beach, which sits at the U.S. end of one of the newest, and fastest (160TB/sec), transatlantic cables and where proximity to large supplies of water enhances the operator’s ability to cool the racks.

Not surprisingly, given the huge (and growing) demand for data centers, capital is flowing quite freely into the sector.  Several large private equity and venture capital providers are active in the market and more liquidity is likely.

About me

Raul Saavedra

I specialize in Data Center real estate for JLL on the West Coast. Prior to joining JLL in 2016, I was a senior asset manager with Digital Realty Trust, Inc., the world’s largest owner and operator of data centers.

Contact me directly by email at raul.saavedra@am.jll.com.

 

 

 

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