Surging need for connectivity has positioned data centres to be favoured investment assets into the future. A vast injection of new supply — which has already expanded the megawatt (MW) capacity of the six leading North American markets by about 20 per cent during the past year — is still projected to lag a rising load from the Internet of things, 5G and data hives, underpinning burgeoning technologies like artificial intelligence (AI), the smart electricity grid and autonomous vehicles.
“The data centre sector is experiencing all-time highs in demand,” Sean Coughlan, JLL’s global head of capital markets research and strategy, reported during an August webinar to explore global commercial real estate trends. “We’re seeing the demand-supply imbalance actually becoming even more pronounced, and we believe there is runway for strong growth.”
The Canada Pension Plan Investment Board (CPP Investments) appears to agree. Earlier this month, it announced its commitment to acquire a 12 per cent interest in the Australian data centre operator, AirTrunk, a company valued at approximately CAD $22 billion. That follows after Fengate Asset Management’s $1.8 billion investment to increase its equity stake and expand hyperscale facilities at eStruxture Data Centers, announced in June this year, and a 2023 joint move by Brookfield Infrastructure and Ontario Teachers’ Pension Plan to became co-controlling shareholders in Compass Datacenters LLC.
On the hosting side of the equation, Alberta’s Minister of Technology and Innovation, Nate Glubish, has just wrapped up a trip to California to promote his province’s suitability for hyperscale infrastructure. A representative from the Alberta Electric System Operator (AESO) accompanied him on the mission to help make the case to major technology companies and cloud service providers.
“Our competitive advantages around electricity, water, telecommunications and regulatory framework are unmatched in Canada and North America,” Glubish asserted before his September 17 departure.
In a recent look at commercial real estate from a credit risk perspective, Brenda Lum, managing director of North American corporate real estate ratings with Morningstar DBRS, highlighted a spurt of data centre transactions as evidence of real estate stakeholders’ improved enthusiasm compared to 2023. Since January, the agency has rated seven such deals (six in the United States and one in the United Kingdom) collectively worth about USD $4.1 billion (CAD $5.5 billion), spiking up from USD $5.8 billion (CAD $7.9 billion) in total data centre transactions over the previous three years.
“There’s so much happening in the data centre space right now and for years to come, given the demand,” Lum said during a webinar earlier this month.
Her colleague, Michael Vidmar, vice president, North American real estate adjacent ratings, sketched out some of the details. Average asking rents have jumped by 13 to 37 per cent in larger U.S. markets with a concentration of hyperscale facilities, which accommodate thousands of servers representing upwards of 100 MW of power demand, while the vacancy rate had fallen to a record low 3 per cent across the total market as the second quarter closed out this year.
Data centre developers have told Morningstar DBRS analysts that about 80 per cent of the space under construction is pre-leased, and that climbs to nearly 100 per cent of in-progress hyperscale sites. Pending completions in major markets are roughly equivalent to 44 per cent of the existing data centre space. Along with traditional hubs like North Virginia, Dallas-Fort Worth and Chicago, Atlanta and the Las Vegas-Reno corridor are identified as rapidly expanding markets.
“Despite historical levels of development in this space, demand continues to exceed supply,” Vidmar said.
Nor is the incoming supply a straightforward gain. Rapidly evolving technology and customer needs are pushing some smaller facilities with lower power capacity into obsolescence. Land availability, tax competitiveness, power prices and power availability are all seen as instrumental to luring new development, while power, cooling and space design are key to ongoing viability.
That increasingly means higher-density power racks coupled with cooling systems to adequately support and safeguard that heightened draw on electricity. Notably, cooling loads typically equating to about 40 per cent of the total energy expenditure have a large impact on operational costs.
“We’re closely monitoring whether these new inventories are replacing existing data centres or supplementing them,” Vidman affirmed. “We’re seeing potentially older vintage, lower-powered co-location centres that are unable to scale up power or implement more efficient cooling systems as a higher credit risk in the near term.”
Musing on promising asset classes earlier this year, in conjunction with the release of the 2023 annual results of the REALPAC/MSCI Canada Property Index, Mark Rose, chief executive officer of Avison Young, reiterated that 2019 would have been an opportune time to invest in data centres.
“We were making that argument five years ago and Canadian fund managers said: No, that’s pioneering,” he recalled. “Everybody would have made a fortune because that’s where the market is going.”
However, market analysts aren’t framing it as a fleeting opportunity. Rather, it’s seen as a prime niche for acumen and deep pockets.
“Data centres require highly specialized operational knowledge and significant amounts of capital investment, both upfront and ongoing,” Vidmar submitted. “Going forward, we’ll continue to monitor such critical infrastructure investment and the ability of data centres to address these three things: power, cooling and design demands over the long term and beyond.”
