Aggressive M&A Activity, Robust Foreign Investment To Dominate Global Data Center Market In 2018

Data center real estate soared in 2017, with global operators absorbing 583.5 megawatts during the 12-month period.

Robust demand and aggressive investment activity in the data center space has reached new highs in the past few years as investors on the hunt for solid returns look beyond core real estate assets like office and multifamily for better yields. Net absorption in the U.S. and Canada led the globe in 2017, accounting for a combined 363.5 megawatts of positive net absorption, according to JLL's Data Center Outlook report.

“The amount of money pouring into [the data center space] from investors is monumental,” JLL Global Data Center Solutions Practice Team co-lead Bo Bond said. “I think 2018 will be a really good, banner year for publicly traded data center REITs.”

As demand, particularly from cloud service providers, continues to spur aggressive construction and absorption in the space, JLL foresees the following trends dominating in 2018. 

Aggressive M&A Activity To Persist

Merger and acquisition activity in the data center space last year exceeded 2015 and 2016 levels combined, and the trend is carrying into 2018.

A total of 48 deals worth about $20B occurred last year, several of which included the Big Six largest data center operators in the world — CoreSite, CyrusOne, Digital Realty, Equinix, QTS and Switch. 

The biggest deals include Digital Realty’s acquisition of DuPont Fabros for $7.6B; Equinix’s takeover of 24 data centers for $3.6B; and Cyxtera’s purchase of CenturyLink’s data centers and co-location business for roughly $2.2B. 

Several deals are already in the works this year, including Iron Mountain’s move to buy IO Data Centers' North American business for about $1.3B and Equinix’s acquisition of Australia’s Metronode for $800M. 

Foreign Investors To Flock To The States

Speaking of Metronode, that deal signals another major trend likely to dominate this year. 

Equinix’s acquisition of Metronode will allow the company to expand its international presence into Australia, adding 10 data centers in four new metro areas to its portfolio. JLL Senior Analyst and lead for the construction and project development industries Mason Mularoni foresees the foreign investment trend continuing — though in the reverse.

“So in 2017 we saw a lot of U.S. companies expanding and partnering with companies in Europe and Asia … to expand services to European and Asian customers,” Mularoni said. “We’re going to see a return factor in 2018.”

JLL dubbed 2018 the “year of foreign interest” and anticipates a large jump in investment activity from foreign buyers looking to expand their operations and footprint in the U.S. The report highlights Chinese investors in particular. To better compete with U.S. heavyweights like Microsoft, Google and Amazon Web Services, Chinese players such as Alibaba, Tencent and Baidu will look beyond their primary markets to overseas assets to strengthen their international growth. 

“These, and many other rapidly expanding players from Japan, Australia, United Kingdom and others around the globe, are diversifying on product and pricing of existing U.S. companies today, albeit on a significantly smaller scale and playing field — for now,” JLL reports. 

Edge Markets To Grow

Another trend likely to gain momentum this year is major providers — the Microsofts, AWSes and Googles of the world — expanding their footprint into “edge markets” to reach more end users. 

The idea of edge markets is difficult to define, Bond said, because the definition changes from company to company depending on their needs. 

“The all-encompassing edge means so many things,” Bond said. “Really, I believe the edge has a different meaning to a provider, to a user and everyone in between. It is how they set up their portfolio and network and the demand of the customers, whether internal or external.”

As operators find that establishing large, centralized data centers is not enough to reach customers, they are expanding their footprints to edge markets to increase user touch points and nodes. This could look like a U.S. operator expanding its presence internationally, or a large provider looking beyond major data center markets to expand its geographic networks to cities like Atlanta, Los Angeles and Phoenix. 

“The growth of technology as a whole is pretty much the main driver,” Mularoni said. “Content that we as a society [use is] growing in terms of the amount and the size and quality of it. [That data] as a whole has to be stored somewhere and passed off to you as an individual.”