Data Center Owners Say Economic Storm Won't Hurt Industry As Tech Giants Increase Cloud Spending

After more than two years of unprecedented growth, cloud providers and data center operators are now navigating the most uncertain economic environment since the pandemic put digital transformation into overdrive.

Yet despite inflationary pressures and a host of economic headwinds sparking fears of a recession, second-quarter earnings reported by the biggest players in the data center ecosystem last week painted a picture of continued demand growth for server space driven by a market for cloud services that continues to expand at a near-record pace.

Executives at Amazon and Google said they are redirecting money away from other parts of their business, such as hiring and developing fulfillment centers, and are putting more money into cloud spending that drives data center growth. Data center REITs Equinix and Digital Realty said they continue to see strong demand, even from sectors that are heavily impacted by the economic volatility, and this has enabled them to continue raising rents. 

Hyperscalers Pouring Money Into Cloud, Even As Headwinds Prompt Cutbacks Elsewhere 

Tech giants like Amazon, Google and Microsoft may be slowing hiring and cutting spending on everything from building warehouses to developing consumer goods, but they’re redirecting much of that money toward their cloud products as demand for platforms like Amazon Web Services, Azure and Google Cloud continues to boom. 

Global enterprise cloud spending in the second quarter grew 29% year-over-year to $55B, according to data from Synergy Research Group — a figure that, adjusted for the growing strength of the U.S. dollar, falls right in line with the market's unprecedented growth rate over the past nine quarters. AWS, Google and Microsoft remained at the head of the pack, together controlling around 65% of a cloud market that experts say is continuing to drive strong growth in hyperscale data center deployment.  

“[The] fact remains that the underlying growth in cloud usage continues to grow at truly impressive rates,” said John Dinsdale, a chief analyst at Synergy Research Group, in an emailed statement. “This has caused a clear acceleration in both the launch of new hyperscale data centers and the level of spending on data center hardware and software. Our forecasts show continued strong growth in all key cloud market metrics.”

This confidence that demand for cloud services will continue to grow despite economic uncertainty was bolstered by comments from the leaders of the largest cloud providers last week. Speaking on earnings calls with analysts, executives at Google and AWS indicated they planned to shift resources toward developing cloud infrastructure, even as they cut back in other areas.

Google CEO Sundar Pichai told analysts the company will “refocus” resources and attention toward cloud and AI, with servers for data centers accounting for the largest percentage of capital expenditures in the coming quarter. 

Amazon, weeks after announcing reduced spending on warehouses and other logistics infrastructure, told analysts Thursday that much of that money was effectively being redirected to digital infrastructure for AWS. While AWS IT spending previously accounted for 40% of overall capital investment, it will now account for more than half of all capital expenditures, with spending on fulfillment and transportation seeing the biggest decline.  

“It's early days in the adoption curve for companies and governments,” Amazon Chief Financial Officer Brian Oslavsky said on the earnings call. “We invest with that confidence in mind — customers have responded and we're going to keep investing there.”

Data Center REITs Project Resiliency As Growing Headwinds Loom

As the cloud market continues to grow, executives say this will keep translating into success for colocation data center REITs and other data center providers, even as the broader economy stumbles.

Speaking on calls with analysts last week, leaders at data center REITs Equinix and Digital Realty remained bullish on the data center industry’s position in the face of an uncertain economic environment. Executives at both firms dismissed suggestions that economic headwinds would curtail demand for server space, even as some of those same forces are expected to drive up rents and other costs for data center tenants in the months ahead. 

“Despite a challenging macroeconomic and sociopolitical landscape, demand remains robust as customers continue to invest heavily in digital transformation,” said Equinix CEO Charles Meyers, calling the company’s Q2 numbers “a clear reflection of the durability of our business model across economic cycles.” 

Equinix reported better-than-expected revenue during the second quarter at $1.8B, up 10% over the same quarter last year. The company saw record quarterly bookings and its highest-ever growth — its 78th consecutive quarter of top-line revenue growth. Digital Realty reported quarterly revenues at $1.1B, up 1% from Q1. Although new bookings were down slightly from the first quarter, the company saw its vacancy rate drop by 60 basis points, with the firm’s leadership pointing to a record development pipeline. 

Executives at both companies are pointing to these numbers as indicators that demand will continue to grow even with economic uncertainty ahead. Equinix’s Meyers highlighted the company’s booking numbers, which he said picked up over the course of Q2 even as economic conditions became more uncertain. 

“The trend line on bookings continues to be strong,” Meyer said. “We're seeing real commitment from folks relative to digital transformation — we're seeing that strength across regions and across sectors, both in the service provider side of our business and the enterprise side of our business, and that’s across virtually every sector.”

This bullish outlook comes even as rents and other costs for tenants are expected to rise significantly. Both Equinix and Digital Realty said they plan to continue raising rents in the coming months, a product of both supply of server space significantly trailing demand and broader pressures on the marketplace like supply chain disruption and energy prices. 

But even with the cost of server space going up for tenants, leadership at Equinix and Digital Realty expressed confidence that tenants will be willing to pay those higher prices. Digital Realty CFO Andy Power said he has seen this play out in past economic downturns, when companies have doubled down on their IT and data center spending. 

“We are really a mission-critical priority; we're not a discretionary spend,” Power said.

“We've also been through a few economic cycles as well, and the history would say that the trend is our friend on that topic.”

Equinix’s Meyers agrees. He said the industry is already seeing signs that digital infrastructure is where companies direct their cash when the going gets tough, even in sectors that are the most vulnerable to macroeconomic trends, such as retail. 

“That's a classic example of a sector that people are saying: oh, boy, a recession could clearly impact consumer wallet spend and retail would suffer from that,” Meyers said. “Well, we are not seeing that show up in terms of their decision-making around their commitment to digital. They simply can't afford not to be prepared for the digital future.”