Specialist
Former SVP at a data cente
Agenda
- Trends and developments impacting the North America data centre operating environment, including general supply-demand dynamics across US tier 1 and 2 markets
- Competitive dynamics and drivers for retail colocation vs hyperscaler growth
- Expectations for pricing, power and supply chain sourcing constraints
- Mid-to-long-term growth outlook
Questions
1.
Could you give us an overview of the data centre market in North America? What do you see as the 2-3 most relevant trends or drivers that we should be monitoring?
2.
What is your competitive analysis for Digital Realty? It is a competitor that comes up quite often. The company has a leveraged position and a great deal of legacy assets that aren’t modernised data centres, as I understand.
3.
You are a former SVP at Cyxtera, which filed Chapter 11 in June 2023. In August, the company filed a plan for reorganisation that would eliminate more than USD 950m of pre-filing debt. There has also been news that Digital Realty and Brookfield might be eyeing some of the company’s assets. What are your thoughts around the Chapter 11 filing and how likely we are to see Digital Realty or Brookfield carving out some of the assets?
4.
Cyxtera has more than 60 co-location facilities across 29 markets. Could Digital Realty be carving out certain facilities? What valuation would you put on that transaction? Would it be in the ballpark of Digital Realty’s USD 8.4bn acquisition of Interxion, completed in March 2020?
5.
How should we think about the threat that hyperscalers represent to companies such as Digital Realty or Equinix in the medium-to-long term? Do you see the assets being obsolescent at some point and losing out to hyperscalers in the longer run? A prominent investor raised concerns about the long-term vitality of the co-location industry, while you noted the health of the industry since the financial crisis.
6.
Would you agree that even with the higher energy costs, supply chain constraints and lack of land availability, none of that has materially slowed down the development of supply? We’re seeing a large amount of supply still under construction across primary and secondary markets. Inventory within North America continues to climb higher, while Northern Virginia saw 2,130 MW of supply in Q1 2023, which is a 20% YoY increase from Q1 2022.
7.
Which secondary data centre markets in North America are attractive for a lender or data centre developer? You brought up edge markets. Austin, Texas, seems to be a very attractive market and is building a lot of supply.
8.
AI has quickly become a material topic and AI workloads are already contributing to current absorption. I’ve seen reporting that they account for a major portion of incoming RFPs [requests for proposal] and many of these deployments seem to be within the 1-5 MW range. Considering the compute-heavy requirements of these deployments, do you see them being pushed to the secondary edge markets or markets with lower power such as New Jersey or Minneapolis? What are your thoughts on the long-term formative impacts of AI on the data centre industry?
9.
What competitors do you think were not able to handle the compute-heavy requirements of AI and other emerging technologies? We discussed Digital Realty having many legacy data centres, which I presume would not be able to handle the requirements of an AI deployment.
10.
What shifts can we expect in data centre construction practices going forwards, given the heavier-compute nature of AI and other emerging technologies? How do you expect that to raise the costs for new greenfield build-outs? You discussed shifts in data centre construction practices so far, including more modularity or flexibility to the builds and the shift from 10 MW to 100 MW-plus facilities.
11.
In May 2023, Reuters reported on a bidding war between Brookfield Infrastructure Partners and DigitalBridge Group over Compass Datacenters. You also discussed Brookfield potentially looking to carve out some of Cyxtera’s assets. It seems that investment activity for some of these data centre assets may have somewhat waned in H1 2023, but there is a heavy PE presence. I think 91% of North America data centres’ transactions came from PE. What’s your outlook for PE-type deals within the data centre market in H2 2023 and 2024, given the higher cost of capital and increased interest rates?
12.
You mentioned the need for data centre facilities to be able to handle higher compute requirements and have new, more adaptive cooling systems. What are customers looking for in an RFP, and how important is the facility’s PUE [power usage effectiveness]? Is a company with a stronger PUE, such as Aligned Data Centers with the patent in cooling technologies in industry-leading PUE, positioned more strongly in the competitive RPF environment?
13.
How do you see the pacing of hyperscale demand, going forwards? It doesn’t seem that hyperscale demand will decline but I might expect it to somewhat moderate due to the bottlenecks we’ve seen with power supply and land availability. Is that a fair assessment?
14.
What’s your sense of the pricing landscape in 2023-24 across North America markets? How high could it trend going forwards? Do you expect to see some stabilisation? In 2022, we saw lease pricing increase across most markets, following a decade-long trend of price decreases due to industry maturation and intensified competition. The CBRE Group put out research that showed that the average asking rate for a 250-500kW deployment has increased around 15%, to USD 138 per kilowatt per month. In North America, the Chicago market seems to have the lowest rate at around USD 115-125 for that deployment, whereas we’ve seen the highest rates in Silicon Valley and Northern Virginia. I think Silicon Valley had the highest or most significant YoY increase in terms of average rental rate increases.
15.
You mentioned new logos being an important feature. I’ve seen vacancies at decade-lows across all major markets in North America. How do you expect vacancy rates to trend over the next 1-2 years?
16.
Do you have any concluding remarks?
