What is driving developers and investors in the data centre sector?

An important component to ensure a well-balanced European data centre market is not only the provision of new supply to satisfy future levels of demand, but to ensure that this is the right product in the right location. In our latest survey of 3,000 senior datacentre professionals across the UK and Europe we asked the developers, and investors that fund and build that supply pipeline, what the key factors are that are driving them and what the major considerations are.

Firstly, it is worth noting that our respondents continue to provide evidence of the on-going confidence in the European market, with almost all developers and investors reporting an expansion in their portfolio of technical real estate in the past six months. Indeed at 95%, it is now the highest proportion that we have recorded since the survey began over 13 years ago.

POWER CHALLENGES

The fact that power availability and cost heads the list is perhaps no surprise. It has been well documented that the European power markets have entered a period of change, with prices touching new highs in a number of European countries; up to four times the average historical level. Electricity demand is expected to increase steadily in Europe, with some predicting a CAGR of about 2% until 2035, driven in part by the

surge in electrification of areas such as transport and the production of green hydrogen through electrolysis.

This means that navigating these power markets will be a key challenge for data centres, driven by a demand from environmental savvy, but cost-conscious, corporates. Since we began this survey 13 years ago, power has consistently been ranked as the single most important factor in the ranking of the drivers of new data centres. The results of our latest analysis suggest that this remains the case, with over two-thirds of respondents choosing ‘Availability of Power’ as their top influencing factor. Indeed, the proportion of those ranking it in either of the top two positions remains at a high of 90%.

As a side issue, there is also a real requirement for participant companies to evolve their power strategies to accommodate this demand. The challenge is to ensure a sufficiency of supply whilst meeting the needs posed by a political and social environment increasingly demanding that such power must be from a cost effective but sustainable source.

LOCATION REMAINS TOP TWO

Location is the second most highly rated factor, with over half of all respondents ranking it in the top two factor choices. When asked about the likelihood that long term supply chain problems could impact in a significant way on future data centre location decisions, 56% of our developer respondents stated that they believed that this would be the case. We would expect this to continue to be ranked highly, particularly against

the background of the UK’s withdrawal from Europe, the fallout of the COVID-19 pandemic, ongoing issues with supply chains and the effect that this may have on the location of company’s data centres relative to the markets that they serve.

There is also little expectation that the current supply chain disruption will disappear in the short term as significant disruption drivers remain; power shortages in China affecting output, the rising price of raw material such as copper, fall-out from BREXIT to name a few, and all are exacerbated by an increase in demand across the world. However, there are some encouraging signs, with key metrics such as cargo shipping costs falling, congestion at ports easing and reported delivery times across the wider economy for manufacturers worldwide reducing.

Access to fibre has emerged as an increasingly important factor with around 10% citing it as their most important choice. Supply chain difficulties may well be impacting our respondent’s views on this issue as the largest concentration of the fibre optics supply chain can be found in Wuhan - epicentre of the COVID-19 outbreak. The Chinese city is home to companies such as Fiberhome, YOFC, and Accelink, amongst others, which together comprise a quarter of the global optical fibre production capacity.

We can also see that political or social stability has become increasingly more important in recent surveys, perhaps reflecting current perceptions and concerns regarding the wider geo-political and economic environments. Whilst the total build-out cost, availability of specialist data centre construction skills and land price are all important factors that are considered when looking at a new data centre build, they are consistently rated behind our top factors by our respondents. However, splitting

out our developer respondents shows that these factors are ranked more highly by this group, just behind ‘Availability of Power’ and ‘Location’, not surprising given that these would have significant day-to-day consequences for them.

WHERE ARE THE SKILLS?

An ongoing area of concern within the industry as it has expanded is the lack of sufficiently qualified professionals available, particularly across the design, build and operations disciplines. Highlighted by the COVID-19 pandemic, where movement of labour was particularly restricted, access to the right professionals is vital to the ongoing health of supply and operations in the European data centre markets

The results for the latest survey suggest that these concerns continue for our respondents from all areas of the industry. Some 90% of all respondents suggested the market for these skillsets is currently characterised by that of falling availability and increasing demand. Those respondents who are at the face of this - real estate developers/investors or design, engineering, and construction (DEC) professionals - expressed this in the most emphatic of terms, with all respondents from this group sharing the view, a clear sign that they are feeling the imbalance.

CONCLUSION

There is no doubt that factors such as supply chain, coupled with the on-going global disruption in energy production, distribution and move towards sustainability and

carbon-neutrality will impact decisions made by developers and investors in the sector which it seems is entering a noticeable period of change.