data center

Real estate and data centers: the essentials to remember

In recent years, data center real estate has experienced remarkable growth. The pandemic has had little impact on this thriving sector. The health crisis has had little impact on its development. Teleworking, online shopping, cloud computing, Tik Tok and the deployment of the 5G network have maintained the demand for technical buildings dedicated to data centers.

Context of data center real estate

Like a steamroller, high technology affects all areas and also influences real estate. Data centers need hundreds of square meters in the middle of a city to be established. Their installations serve as supports for an ultra-digital life. The operation of telephones, computers and other SmartTVs depends on data centers. The latter occupy large areas and weigh heavily on real estate.

To minimize the latency period, high-tech companies need premises located close to the target. To get closer to its catchment area, these companies do not hesitate to invest in several buildings. They can also rent entire floors of a skyscraper. In both cases, these specialized service providers choose the best locations, even if it means paying the highest price and driving up the price of real estate.

The deployment of 5G technology as well as the democratization of Cloud computing give rise to very specific demands that real estate players must meet. Their mission is to build complexes intended for data centers. These customers demand the best possible locations to be closer to users. At the same time, they impose very strict specifications.

American demand continues to grow

The hyperconnected lifestyle of Americans explains the exponential growth of data centers in the country of Uncle Sam. The deployment of the cloud and 5 G requires significant real estate investments just for the data centers. As of 2017, high-tech companies have totaled annual spending of $11.5 billion for the benefit of this promising sector. This sum includes technologies, technical infrastructures, but also specialized real estate.

From 2018 until the beginning of 2020, investments decelerated slightly. Paradoxically, the pandemic has not affected the sector that much. However, the crown virus has claimed 900,000 lives in the United States since the appearance of the disease. The first year of the health crisis, data centers required nearly 458 megawatts of energy. Vendors have had to quickly increase server capacity to meet a surge in cloud computing demands.

American data centers are seeking to satisfy business needs such as remote working software, videoconferencing and 5G mobile networking. The disruption in the financial market has still slowed investments. Land occupation thus fell slightly between 2019 and 2020. Regardless, the sector is staying the course and regaining confidence in 2022.

The global data center real estate market

When it comes to real estate investments for data centers, the Americans remain at the head of the race. That said, sectoral competitors in Europe and Asia are also working to catch up. On the old continent, installations are mainly found in London, Paris and Frankfurt. Cities such as Amsterdam have also responded to growing demands. For Asia, investors are focusing on Tokyo buildings. The Levant shares the area with the summer city of Singapore and the city of Shanghai in China.

Thousands of square meters are thus devoted to data centers around the world. However, the United States still holds the records for treatment capacity and volume. The American market is dominated by Northern Virginia, whose energy expenditure peaks at 1,377 megawatts. 7 other localities also have a high concentration of data centers. They are Dallas, Phoenix, Silicon Valley, New York City, Atlanta, Chicago and Tri-State. This area includes New York State, Cincinnati and New Jersey).

European market leader, the city of Londonconsumes 710 megawatts for its data centers. Which barely amounts to half of the energy needs of Northern Virginia (USA). In France, the sector mainly focuses on Ile-de-France. This region offers proximity to national customers. It also has the necessary resources for technology centers. Number 1 in Asia-Pacific, Tokyo devotes 738 megawatts to its server and supercomputer installations.

France is doing well!

2021 was a fruitful year for France in terms of data centers. The servers are concentrated around the capital and influence local real estate. In any case, the Ile-de-France region meets the necessary conditions for sectoral growth. It has efficient means of communication, particularly with its fiber optic network directly connected to the Middle East and Africa. Indeed, customers are mainly found in these places. Some of the portfolios are also located in North America.

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Ile-de-France is third in Europe behind the metropolis of London, Amsterdam in Holland and Frankfurt, the German technological capital. Investors remain confident even though the market recently experienced an 11% drop in value in 2020. This decline deprives it of a global podium. That said, the sector is recording growth of around 30 % for 2021.

New projects will increase energy expenditure in Ile-de-France centers by 66 megawatts. According to AFP, some 138 sites were identified in the region in 2021. These service providers need fiber optics, a high-voltage electrical network, but above all a secure environment. The Paris metropolitan area is less exposed to the risk of natural disasters.

The complexity of data centers goes beyond real estate challenges

A data center is organized like a factory. It includes several buildings arranged like a campus. That said, each provider may have their own configuration depending on their activities. Storing large amounts of data requires miles of cabling and piping. Ventilation systems must also be put in place. The best installations can even produce energy by recovering heat from servers or using roofs covered with photovoltaic panels.

The real challenge would be to deal with the heart of an urban environment. The journey begins with administrative procedures. The building must meet a certain number of criteria to benefit from the ICPE certificate. This document is granted to any Installation Classified for Environmental Protection. In addition to the building permit, an operating license is required.

Rules for servers and data centers differ from country to country. Generally speaking, the site must be located far from areas at risk of fire or flooding. That said, a medium or high voltage electricity network should serve it. In short, data centers require a phenomenal investment. For example, Data4 plans to spend around a hundred million euros on a single center in Poland.

Tough competition with other sectors

Data centers are facing a real property war. As they seek to establish themselves in the best city locations. They thus enter into competition with other types of requests including self-storage boxes and furniture storage. E-commerce hangars are also in the battle. However, data centers have more criteria to meet than others.

Easier to deploy, traditional warehouses often take over ideal locations. Furthermore, they obtain their building permit more easily. Self-storage real estate projects quickly find buyers. They manage to sell square meters even before construction begins. There are fewer real estate developers specializing in data centers.

Investors prefer to make their capital profitable with traditional logistics warehouses rather than a data center. Faced with a lack of supply, many companies are creating their own sites and deploying servers on their behalf. These companies also face a great challenge since you often have to fight to find the best locations. When a plot of land or an apartment becomes available, only the “first on the ball” will be served.

New practices in the sector

Real estate specific to data centers does not work exactly like other sectors. Investors take less risk by acquiring premises when they are certain of lasting demand. They then find tenants before even signing a sales agreement with the landowners or trustees. This approach helps to make the capital invested more quickly profitable.

Concurring studies show that the volume of data stored and processed will increase by 600% by 2025. Forecasts show a significant improvement in yields. In terms of profitability, some suppliers are already able to provide profit figures. Ebitda generates 20 times more margin than in traditional rental real estate. This rate would even reach 2800% in the best sites.

The efforts are bearing fruit for real estate developers who have focused on data centers. However, the challenges to be met multiply over time. At a time of global warming, environmental constraintis current. Energy-intensive technical centers are singled out by environmentalists. Promoters have no choice but to work on servers that consume less electricity. The effort focuses on the cooling system (free cooling) which consumes neither electricity nor greenhouse gases.

What future for data center real estate?

The world is moving towards resolving the health crisis. The post-covid19 context calls for a relaunch, but the cost of building a site with servers and supercomputers remains 20 times higher than a self-storage hangar. The challenges remain the same as before. In particular, you have to fight to establish yourself in the best locations.

Competition with logistics specific to e-commerce will become even tougher. In addition to professions born from digitalization, certain professions are adopting teleworking and cloud computing. Among others, there are social networks which require the maximum number of servers. This is also the case for video-on-demand platforms and Internet television. The economy is barely starting to recover when geopolitical tensions appear and who will live will see.