Global market for data centres can hardly cope with rapid increase in demand

The global Internet industry has been growing at an exponential pace in the past few decades, driven by increasing numbers of applications and wide adoption in every aspect of work, play and life. The amount of data, too, has increased exponentially— particularly during the past 10 years. Numbers of global Internet users have been growing—at 8% per year—and data creation growth has far surpassed that, averaging 32% per year for the same period, driven by more-advanced technology and increased per-capita usage (Exhibit 6), all of which has translated into increased demand for data centers.

Demand for Hyperscale Data Centres Is Particularly Strong
Within the data center sector, the demand for hyperscale data centers in the form of large-scale facilities that cater to a handful of users that have very large capacity requirements, including cloud providers and technology companies, has been particularly strong. Global hyperscale cloud revenue doubled from 2019 to 2021 and is forecast to continue growing at more than 30% per year, according to Structured Research.

In the face of that rapid surge in demand, the global data center market has struggled to keep up, with total capacity rising only 20% per year from 2016 to 2021, to 12,700 megawatts. Current supply pipelines are slower, with forecasts for additions at 13% per year during the next three years, with a focus on existing data center hubs such as Northern Virginia, London and Sydney. Apart from the economic and population scales, which underpin consumer demand, major data center hubs also have to meet a host of criteria such as availability of power, existing cloud operations and fiber-optic cable network connectivity, according to Cushman & Wakefield.

The Sector Is Challenged by Ageing and Loss of Value
Notwithstanding the strong structural tailwinds, several factors continue posing major challenges to the sector. Obsolescence and depreciation risks rank at the top because of rapid technological progression in both server hardware design and data center design. Technology advancement in the former leads to greater efficiency in server usage based on increased data storage and computation speeds, whereas changes in cooling technologies will mean evolving data center designs. Sustainability drivers have led also to an urgent need to lower carbon emissions in this power-hungry sector, and renewable energy and energy usage efficiency are viewed as important solutions by operators.

Nevertheless, investors remain increasingly keen on the sector— especially as they roll out digital strategies that focus on digital assets and infrastructure with a view to future-proofing their portfolios; and the transaction volume of standing assets has doubled in the past two years. Aside from major data center operators such as Digital Realty and Equinix that have been acquiring smaller competitors, the sector has gradually become less of an alternative sector, and private-equity firms, sovereign wealth funds and traditional real estate investors have also been building exposure.

We expect that continued advancements in technology such as 5G, the Internet of Things and increasing adoption of cloud technology will continue driving demand for data centers and that investors entering this space now could still remain relatively early movers.

A guest post by Peter Hayes, Global Head of Investment Research at PGIM Real Estate