Double-Digit Growth Expected In Data Center Industry

Thanks to the rapid pace of technology, data centers are primed for significant growth over the next few years. Mobile computing, the Internet of Things and cloud computing are driving significant demand in the data center industry, according to Cushman & Wakefield Senior Director and Data Center Practice Leader Gene Williams.

"We’re going to see continued growth in the segment for years to come,” Williams said.

Cushman & Wakefield estimates multi-tenant revenue growth will be 12% to 14% each year for the next two to five years. A majority of the growth will come from retrofitting existing properties instead of ground-up development. Retrofits are more cost-effective since they tend to have access to utilities already, according to Williams. 

There are 600 operators of data centers in North America, he said. With so many operators, there have been a lot of mergers and acquisitions and Williams expects more.

“It’s a very profitable business,” he said.

The best way to create opportunities for investors after companies have built up a ton of value is simply by selling the company instead of individual data centers, he said.

Williams, who joined the valuation team at Cushman & Wakefield in April, will oversee the valuation and advisory data center team on a national and international basis. His team will assist owners, operators and lenders with valuation services.

Public companies are the largest players in the industry and need periodic valuations. Financial regulations require banks to have an appraisal before they will lend. Williams' team also handles machinery and equipment valuations, purchase price allocation and cost segregation services.

Top Data Center Growth Markets

While data centers can expand to any location as long as they have access to utilities and are near transportation, Northern Virginia remains the top market nationally with Texas, Chicago and Silicon Valley close behind. Amazon, through its Amazon Web Services subsidiary, is among the top companies leasing space.

Silicon Valley is among the largest markets in the West because of its proximity to global tech industries and the availability of engineers to manage servers. Northern Virginia is an ideal location because of its access to fiber and lack of natural disasters. Cost of power is also cheaper in this market.

“Tenants almost always pay for power,” Williams said. “How efficient a data center is is important to them.”

Not all locations are ideal. A lot of people moved to Phoenix and desert cities to expand data centers, but found it was more expensive to keep these centers cool. California is a valued market because it is easier to cool data centers, especially with many cities close to water, Williams said.

Coastal cities and those near water have become more popular because water cooling can create better efficiencies. With an increase in hurricane activity in several coastal regions, data center operators are evaluating additional risks to keep these centers in these areas. Operators in Houston, a large data center market, are looking into the additional flood risks and many were already outside of a flood zone prior to the latest hurricane.

Another downside to the rapid growth in the industry is growing pains, Williams said. The business requires high barriers to entry and extremely high hurdles and requires additional knowledge and technical expertise.

“It’s hard to find the talent,” he said.

Find out more about the data center industry during Bisnow's Data Center Investment Conference & Expo West on Nov. 30 in San Jose.