'A Massive Uptick In Interest': 2021 Was The Year Data Centers Exploded
The pandemic made 2020 the year that hit the accelerator on digital transformation — but 2021 saw the emergence of dramatic shifts in how data centers and digital infrastructure are developed and financed.
A data center development boom has continued throughout 2021, pushing into new markets across the U.S. and the globe as cloud providers drive a seemingly insatiable need for data processing and storage.
New investors and a tsunami of cash dramatically changed the data center industry’s corporate landscape, while billions in new government spending on digital infrastructure could transform its physical footprint.
At the same time, data center developers and operators have faced shortages of both materials and labor, along with continued security threats and the growing consequences of outages.
The industry has also struggled to take meaningful steps toward sustainability in the face of increased public awareness of data’s environmental cost, while cryptocurrency mining’s place in the overall data center ecosystem remains very much in flux.
Here are the top stories from a pivotal year for data centers and digital infrastructure:
1. Industry-wide growth continued, with cloud providers at the forefront
The most recent round of earnings reports show consistent revenue growth across the data center industry, and a development boom is in full swing. Data center construction rose a remarkable 42% across major North American markets, according to the latest numbers from CBRE, with historically low vacancy rates reflecting rising demand for server space.
Major cloud providers - particularly the big three of AWS, Microsoft and Google - have spearheaded this growth, with revenues from cloud infrastructure services increasing by 37% year on year. This has meant a wave of hyper-scale data centers coming online, with many more on the way.
“The constants in all of this are that both the number and average size of hyperscale data centers continue to grow steadily,” said Synergy Research Group Chief Analyst John Dinsdale. “We also see a very healthy pipeline of hyperscale data centers being planned, developed or fitted out, supporting strong five-year growth forecasts.”
2. A flood of investment pushes a wave of billion-dollar M&A deals
2021 saw some of the data center industry’s biggest players sold in a wave of multibillion-dollar deals.
Blackstone Group purchased QTS Realty Trust in June, taking the data center REIT private in a deal valued at over $10B. In November, data center REITs CyrusOne and CoreSite were both acquired on the same day in separate deals with a combined value of over $25B. CyrusOne agreed to a $15B deal that saw the data center firm taken private by KKR and Global Infrastructure Partners. CoreSite sold to American Tower in a deal valued at over $10B.
As the year comes to a close, reports are emerging that data center provider Global Switch may also be on the verge of a multibillion-dollar buyout, with a host of data center companies and private equity firms among the suitors.
Why the surge in M&A activity?
Experts point to the flood of capital pouring into data centers, much of it from investors — from private equity firms to sovereign wealth funds — who previously stayed away from digital infrastructure but now view it as a safe bet. With demand from investors exceeding supply, this has meant offers far above revenue projection or share prices.
“There’s so much institutional capital trying to find a home,” said Jim Grice, a partner and co-leader of the Global Data Center and Digital Infrastructure Team at Bryan Cave Leighton Paisner. “We’re seeing a massive uptick in interest level, and there’s a huge supply of cash but not as much product as the dollars want.”
3. Are public data center REITs about to go the way of the dinosaurs?
With QTS, CoreSite and CyrusOne all exiting public markets following their acquisitions, only Equinix and Digital Realty remain as publicly traded data center REITs. Private equity firms hungry for data center assets may have driven this trend. But experts also point to gathering headwinds that are incentivizing data center and digital infrastructure investment trusts to flee public markets.
4. The federal infrastructure bill could have major implications for data centers
There may only be a single direct reference to data centers in the $1.2 trillion infrastructure bill passed by Congress in November, but industry insiders tell Bisnow the legislation will have wide-ranging impacts on data center development for years to come. The bill directs more than $130B in federal spending toward improving digital and energy infrastructure — programs that industry leaders say may change the landscape of where and how data centers are built.
A massive rollout of optical fiber and other broadband infrastructure envisioned in the bill could open up new regions for data center development, experts say, while improvements to the nation’s energy grid will lower costs for operators.
5. It’s not just the infrastructure bill that has the industry focused on Washington
Beyond the billions in subsidies for digital infrastructure outlined in the infrastructure bill, the federal government is increasingly driving demand for data center space in certain markets as an array of agencies and the military switch from their own data centers to the cloud.
The past year has seen cloud providers like Microsoft and AWS unveil a range of cloud products targeting government organizations, as well as a series of legal battles between AWS, Microsoft and Oracle over military and intelligence agency cloud computing contracts valued in the tens of billions of dollars.
6. Regional data center hubs grew in scale and importance as data centers move toward the edge
While near-record growth for the data center industry throughout the first half of 2021 centered around the traditional data center hubs of Northern Virginia and Silicon Valley, analysts at both JLL and CBRE suggest that a more decentralized data ecosystem may be right around the corner — with future growth focused on regional hubs and secondary markets.
There are signs that longtime hot spots like Data Center Alley are facing new headwinds, and are now competing against the emergence of new data center boomtowns like Phoenix and Atlanta. Market forces may also be pushing data center operators and investors toward smaller secondary markets, a trend accelerated by a shift toward so-called edge infrastructure and growing fiber rollout across the country.
Areas like Hillsboro, Oregon, Columbus, Ohio, Miami and Salt Lake City are all seeing significant data center development, offering affordable land and power and, increasingly, tax benefits. Often, a hyperscale building a facility in a region has paved the way for further data center development.
The stage also seems to be set for this decentralization of digital infrastructure to continue, particularly as the infrastructure bill subsidizes the so-called middle mile fiber needed for data centers. Hyperscale projects are in the works in data center deserts like Massachusetts as developers increasingly prioritize proximity to population centers.
Experts also tell Bisnow that, with the help of infrastructure bill subsidies, research institutions and industries like agriculture will increasingly serve as anchor tenants for data center builds in rural America.
7. Supply chain and labor shortages emerged as hurdles to growth
Data centers are facing shortages of the materials needed to build them and the people needed to operate them.
While a shortage of silicon chips has garnered the most media attention, the data center and telecommunications industries are also having trouble acquiring the optical fiber cables needed for network infrastructure, the result of lingering manufacturing and supply chain disruptions caused by the coronavirus pandemic. AT&T, the largest buyer of optical fiber cable in the U.S., significantly paired back its planned network expansion because the company couldn’t secure enough cable to meet its goals. Steel shortages have also caused delays and added to construction costs for data center developers.
Meanwhile, data centers face a silver tsunami as nearly half of the industry’s operations workforce nears retirement age, according to one study. Efforts to build a more robust talent pipeline — such as by focusing on recruiting veterans — have yielded mixed results.
8. Lots of talk about sustainability, but many doubt whether meaningful action has followed
Facing pressure to reduce power and water usage, the major cloud providers and data center operators unveiled a range of sustainability initiatives over the past year — and spilled a lot of ink promoting them. Google, Microsoft and AWS all announced plans for their data centers to become carbon and water neutral in the years ahead.
But while sustainability has become a central talking point, an Uptime Institute study showed that most data center companies are not even measuring key aspects of their water and power usage, especially those metrics that don't tie directly to their bottom line. Less than a third of companies surveyed tracked carbon emissions, while less than half tracked their water usage.
Despite evidence that the data center industry’s commitment to sustainability may be all talk, 2021 did see hyperscalers emerge as a driver of renewable energy development in some markets, subsidizing solar and wind infrastructure in places like Georgia and Utah.
9. Billions are flowing into cryptocurrency mining, but many traditional data center operators remain skeptical
Cryptocurrency mining exploded across the U.S. in 2021, but how this growing industry fits into the traditional data center landscape remains an open question.
The industry’s approach to crypto has been cautious at best. Data centers operators have been skeptical of crypto miners, seeing them as credit risks that bring potentially problematic power demands and new engineering challenges. Yet there are signs these attitudes may be changing as growing familiarity with the mining business model has led to better tenant vetting and to agreements designed to mitigate the risks inherent to cryptocurrency. Meanwhile, colocation facilities outside traditional data center hubs are starting to see crypto as a key piece of their future business model.
At the same time, plans for a number of large-scale crypto mining operations throughout the U.S. emerged over the course of 2021, many hooking into power sources that don’t meet the green energy criteria of major data center tenants. A massive crypto-mining campus attached to a nuclear power plant is planned in Pennsylvania.
Texas, meanwhile, is trying to position itself as the U.S. hub for cryptocurrency.
10. Hostility toward data centers is on the rise
Local opposition to data centers made headlines in communities across the U.S. throughout 2021. From two cities in Arizona to a pair of towns in Connecticut to rural communities in Virginia and Oregon, local governments and community groups have sought to block or curb data center development.
Experts say data center developers need to start paying attention and may have to start accounting for a new political reality.
“We're seeing it firsthand with a few clients around the country where they thought they had an inroad in very supportive cities and development authorities, but now they're getting some rabble-rousing from the local populace,” said Michael Rechtin, a partner at Seyfarth Shaw LLP who heads the firm’s Data Center Services group.
“Places that were previously supportive are now saying, 'Well, maybe we really don’t want this.'”
