As Supply Chain Concerns Grow, Cloud Players Scoop Up Data Center Space
Data center leasing has kicked into warp speed, as cloud players and social networks race to procure cloud capacity for long-term growth. The record leasing is driven by concerns about project delays from supply chain disruptions.
Data center leasing has kicked into warp speed in the first quarter of 2022, setting records for absorption as hyperscale operators race to procure cloud capacity for long-term growth.
Activity in early 2022 has been accelerated by concerns that delivery of future capacity may be slowed by supply chain disruptions, which are beginning to cause more delays in data center construction. Hyperscale customers – a group led by Meta, Amazon Web Services, Microsoft and Google – are racing to reserve space to ensure they have room to keep growing.
The resulting leasing activity has been extraordinary. In its summary of first quarter market trends, datacenterHawk reported a record 800 megawatts of absorption, the equivalent of the full-year leasing during the pandemic-driven building boom of 2020.
“These large customers are using and leasing infrastructure in ways they never have before, and it’s created a market we’ve never seen before in our space,” said David Liggett, founder and CEO of datacenterHawk. “I’m not trying to make headlines. I’m just saying that the environment we’re in is really unique.
“A lot of this is pre-leasing,” said Liggett. “A number of these companies are looking 3 to 5 years in the future. They are trying to get out ahead of what may be a challenging next few years. We’re in the thick of supply chain challenges right now.”
Securities analysts have also noted the change in the market. In early April, Credit Suisse analyst Sami Badri predicted historic leasing for the quarter of about twice the normal levels due to unusual demand from hyperscale customers and large enterprises.
“What is becoming very obvious is outsourcing is sharply increasing as major hyperscalers are scrambling to find enough data center capacity globally to host their significant incoming workload activity,” wrote Badri. “Industry executives suggested that there were signs of leasing pull forwards by cloud customers.”
Badri said these tenants were “pulling in 2023 and 2024 demand into 2022 signings. Construction lead times have extended industry-wide, forcing every cloud to begin conducting multi-year capacity planning with partners, versus historically only doing multi-quarter planning.”
A Unique Convergence of Demand Drivers
There are signs this activity may not be a new normal, but rather a unique convergence of surging demand, increased outsourcing to third-party developers, and concerns about project delays due to supply chain disruptions.
It remains to be seen what affect this “pull forward” leasing by hyperscale operators may have on the data center market in the second half of 2022. Have cloud operators satisfied their appetite for the remainder of 2022? How might the data center construction market fare as it seeks to digest these huge deals? Will it become even harder find short-term data center space? The answers to these questions are not immediately clear.
The outsized leasing is being driven by three factors:
- The continued super-sizing of data centers and cloud campuses to help speed growth.
- An apparent strategy adjustment by some hyperscale customers, who are shifting more construction work to third-party developers, using leased space or build-to-suit projects rather than building data centers themselves.
- Growing concern about delivery times for new data canter capacity, as existing supply chain disruptions are further complicated by the war in Ukraine and ongoing COVID-related lockdowns in China.
This trifecta has convinced large customers to make longer, larger commitments for the physical infrastructure required to deliver cloud services. It places a premium on the availability of land for long-term development, reinforcing our focus on data center site selection in the DCF 2022 forecast.
Building Bigger, on Every Level
The super-sizing of data centers is a theme Data Center Frontier has been tracking over the last five years, noting capacity design trends in hyperscale campuses and the developers that serve cloud clients.
This growth is occurring across form factors – everything from data halls to buildings to campuses have all grown in size.
- Turn-key data suites used to be standardized at about 1.2 MWs of capacity, but new buildings feature 6MW to 8MW halls, and some are as large as 10 MWs.
- Switch operates data centers of more than 1 million square feet. In Northern Virginia, Digital Realty, CloudHQ and Vantage Data Centers have all created 96MW buildings, while the newest Aligned data center is expandable to 120 MWs.
- Cloud campuses are bigger in terms of acreage and megawatts. In the U.S., Quantum Loophole is creating a 2,100-acre campus in Maryland. The trend is global, including recent announcements of a $4 billion, 495 MW campus in Portugal, and a project in Indonesia planned for 600 MWs.
“The growth in the sizing of customer requirements on the hyperscale front has been building for some time,” said Andrew Power, the President and Chief Financial Officer of Digital Realty. “It’s not necessarily a completely overnight phenomenon. You’re seeing this digital transformation wave in the cloud customers, despite the volatility and the uncertainty of an economic backdrop or the war, and they’re leaning in and securing infrastructure to future-proof their runway for their end customers.”
“We’re seeing an exponential shift in adoption of cloud computing, and it doesn’t seem to be slowing,” said Douglas Adams, CEO of NTT Global Data Center Americas. “In September, we started to see a pretty big uptick for us, and it’s accelerating.”
“There was clearly an influx of demand with the hyperscale players last year,” said Mark Kidd, Executive Vice President and General Manager of Iron Mountain Data Centers. “We are hearing people talking about larger requirements. The demand I’m seeing right now, I wouldn’t have thought was possible just two years ago.”
Iron Mountain is one of the beneficiaries of this trend. This month it signed a 72-megawatt lease at its Northern Virginia data center campus. Meanwhile, Digital Realty reported 77 MWs of hyperscale leasing in North America in the first quarter.
The Build Versus Buy Equation is Shifting
Cloud builders need more data centers because their business is growing fast. In the first quarter, Microsoft Azure revenue rose 46%, Google Cloud saw sales increase 44% and Amazon Web Services had 37% growth – an amazing growth rate when you consider that it has been 16 years since AWS launched its first cloud product in 2006.
New data from Synergy Research Group shows that first-quarter spending on cloud infrastructure services reached $52.7 billion, with trailing 12-month revenues reaching $191 billion. Here’s what that growth looks like when charted over the past five years:
The hyperscale operators are good at building data centers. But as their operations grow, their company-built campuses must also navigate a difficult construction environment, with shortages of both supplies and labor. That combination is prompting a greater reliance on developers specializing in data center construction.
Badri closely watches the “build-versus-buy” equation for hyperscale operators, who typically construct their own huge campuses but also lease space from providers of wholesale data center space. In January, he projected the percentage of leased capacity to grow from 50% to about 60% of new data centers. Instead, he says, that number is now at least 75 percent.
“It’s become more challenging to be a provider,” said Digital Realty’s Power. “You have the inflationary pressures, you have supply chain challenges, you have labor challenges and you even have moratoriums in certain parts of the world.
“I don’t think the pendulum has swung to a point where the self-builds are off the table,” said Power. “But I would think in times like today – when there’s increased volatility, supply chain issues, a war in Eastern Europe – having a global platform to support growth across 50 metropolitan areas is a tremendous value-add to our hyperscale customers.”
The Supply Chain Struggles Are Slowing Some Projects
Supply chain pressures are very real for the data center industry. While most operators said they had not seen major project impacts through 2021, the industry has begun to feel the supply chain pinch in early 2022, either in delays or significant price hikes on hard-to-find equipment.
“From semiconductors to construction times, the state of the supply chain ecosystem will continue to disrupt data center operations and development in 2022,” said JLL in its 2022 forecast.
Significant disruptions in the data center supply chain forced data center equipment vendor Vertiv to pay higher prices for data center equipment and components in late 2021.
“Supply chain issues are still a challenge,” said Vertiv CEO Rob Johnson in the company’s recent earnings call. “Our pain points continue in these areas of electronic parts, fans and breakers. We are not sitting idle. We are working daily on countermeasures to help us address these challenges, and expect that the challenges will continue through 2022.”
“Data center delivery times are now being delayed approximately 6 months, which compares to our October 2021 sector update of only about 3 months delayed,” Badri wrote in a client note. “Despite the delays being unfavorable for customers, there has been a mutual understanding between the data center operators and customers regarding the delays against signed contracts … The customers themselves are seeing similar supply chain delays.”
Digital Realty’s development pipeline is at an all-time high, with 44 projects underway. Of the 300 megawatts of capacity being built, 58% is already pre-sold.
Building data centers is a capital-intensive business, and requires substantial up-front investment. Building tons of data center capacity to meet future demand might seem risky, and some might wonder if the flurry of leasing could lead to a repeat of 2013, when pricing softened in several markets due to excess supply.
That’s less of an issue with the 2022 building boom, as most of the new capacity is pre-leased, meaning large customers have committed to lease the space ahead of time, often before construction begins. As an example, Digital Realty’s development pipeline is at an all-time high, with 44 projects underway. Of the 300 MWs being built, 58% is already pre-sold.
As the data center industry works to deliver on all the large deals signed in the first quarter, there will be pressure on site acquisition teams, especially in markets with already low vacancy rates and limited supply, such as Northern Virginia and Silicon Valley. Procuring the land and power for long-term growth will be a priority for data center developers and their customers, and operators who possess both will be in a strong market position.