From Hype to Hyperscalers: NAI Global Discusses Trends for Data Centers
Data centers have exploded in importance over the last year and a half. Kevin Goeller, principal, NAI KLNB, has over 21 years of experience in the field of data center development, sales and leasing, but says that, lately, exponential change is driving demand in this asset class. He spoke to REBusinessOnline about the booming need and limiting factors for data centers.
REBusiness: Tell us about the sudden, increased demand for data centers. What amount of this demand is due to the pandemic driving people to work from home? What amount of the demand is here to stay?
Goeller: Prior to the pandemic, we were already in an upward curve because of the added disciplines of 5G and edge data centers contributing to the already competitive growth of the hyperscalers and multitenant data centers. Data center development didn’t have the interest from institutional investors that it does today; these assets were just starting to get these institutions to chase them as a real estate discipline. Fast forward to the pandemic, which added Zoom, Microsoft Teams and other video conferencing and work-from-home needs. These put additional pressure on an already pressurized discipline, an asset class already trying to adapt and grow.
REBusiness: How has this exponential acceleration during the pandemic varied from the traditional cycles you’ve seen?
Goeller: Typically, in this particular discipline, we have a movement in the market for investors to acquire and develop as much as they can. Then there is a cooling off period, and the cooling off period usually lasts about three to four years of just “flat” development. Usually after that, all of a sudden, you have a rush again for data centers. We never saw that “flattened” three years. As soon as we started to cool off, the pandemic hit.
REBusiness: Where do you see this trend going from here? How much longer can this explosive growth last?
Goeller: In the last three years we have doubled our data center density nationwide. And we see the density we have today doubling again in the next five years. That’s massive growth.
REBusiness: Who are some of the major players in this class?
Goeller: For multitenant data centers, important players include CyrusOne, QTS and Yondr. Important hyperscalers include companies like Google and Amazon. Microsoft is another hyperscaler company that’s now completing its own builds, although historically Microsoft has been locating in multitenant data centers.
A lot of the institutions now have earmarked discretionary capital in the data industry, a billion here, a billion there. These institutions are now playing in the game as well. They are driving a lot of the building that’s going on.
REBusiness: What are some of the characteristics that make up a good location or market for data centers at the moment?
Goeller: Power is the number one driver of data and data centers. In the United States, we have East Coast, West Coast and Texas — those are your three power grids. If you’re looking to place capital in the data industry (regardless of what kind of data center you’re involved with), you want to have placed capital in each of the three grids.
Power is first, but diversity of power, if you can get it, makes for a good location, and in most places in America, diversity of power is possible.
Texas is probably your number one power grid. They have a great stable power system, but there have obviously been failures of management lately. After Texas are the East and West Coast grids: on the East Coast power is cheap, except when you get start getting up further north, where it gets a little bit expensive. The West Coast has a number of its own issues, including fires.
Power drives data first, then connectivity with fiber. Water supply (for cooling) drives location. However, there are new technologies arriving annually that either reduce the amount of power needed or increase the number of servers that the power can run.
REBusiness: Long-term, what is important in terms of location, and how might this change?
Goeller: When we first started, we were doing brownfield development, meaning that a data center operator/user/developer would come into the market, buy an existing large warehouse and convert it into a multitenant data center. Then hyperscalers like Amazon and Google came along, but they didn’t just take over one building. They took over a development or an entire complex all at once. Now, the big hyperscalers have come. They take, say, 200 acres of ground and build their entire campus. They’ll spec that it’s going to be built in 10 years and just build it out and grow from there.
In all the major data center markets currently (places like Ashburn, Virginia, the number one market in the world), these locations are so sought after because they are the extremely connected with fiber and they have the cheap and redundant power.
The next iteration of the data centers will focus on 5G and edge data centers (a smaller and more “local” kind of data center). These must be located on the power grid, but they can be in more rural areas. 5G is already being used inside buildings and will permeate many rural communities in the near future.
As far as demand, I think certain markets that are subject to big hurricanes and flooding are less sought after than others. But there are a lot of second-tier markets that would have been unthinkable locations 10 years ago, including Western, drier markets like Arizona. But now that this is a real estate industry that everybody’s chasing, it’s getting easier to put data centers in a neighborhood near you.
REBusiness: What trends are you seeing for data center development and the technology to keep them running?
Goeller: The re-evaluation of all the large tracts of commercial land with the attributes we have been speaking of is a critical trend nationwide. Rental rates are going up for all the traditional users because of the serious competition for the land, and there may be a need for different kinds of zoning for these data buildings.
We’re also already seeing some political pushback now about data center development, because they are massive buildings. Still, the tax base benefits the communities like no other discipline. There’s an important question of how data centers are going to grow and exist in communities in the future.
As far as trends, I would just say keep your eyes on the new disciplines that are coming out. The impact of 5G, ecommerce and warehousing is just beginning for industrial.
I think renewable energy is going to be critical in the next 10 years. There’s the opportunity to hook into new power grids (hydroelectric, windpower, other generators, even nuclear power) that are carbon neutral. I think that is the future, in some fashion.