Landlords stand to gain from higher rents due to growing demand for storage space.
Big data is big business. Storing it is too.
Warehouse owners were already tapping into the demand for space created by cloud computing. Artificial intelligence has turbocharged that trend. Landlords are building bigger, more powerful data centres and a European leasing frenzy, reminiscent of that for last-mile logistics during the pandemic, is under way.
Extra demand for space creates a constraint in terms of the supply of power. New grid connections take years so a glut of space in the short term seems unlikely. This creates the strongest fundamental backdrop in any property sector in 25 years, according to Green Street’s Peter Papadakos.
Data centres tend to cluster around core European business locations: Frankfurt, London, Amsterdam, Paris, and Dublin. These sit on major junctions of communications and power cables. Low latency — the time to send data and receive a response — is key for businesses and also matters for deployment of AI applications.
Limited supply of data centres is holding back take-up and pushing rents up. Underlying demand is essentially unconstrained. Globally 33GW of space was needed last year, thinks Citi, expected to rise to 100GW by 2030. Europe accounted for about 5GW of that, up about a quarter. Growth is expected to slow down to low-teens in the next few years. US-listed Digital Realty recently raised $1.7bn to fund further growth.
Demand comes from the so-called hyperscalers, big US tech groups that typically take space by the building and on a pre-let (pre-construction) basis. Landlords currently have the upper hand: 15-year leases with a break clause are common. Some tenants will accept paying maintenance and investment costs to secure leasing deals. Average rents across Europe are expected to grow at a high single-digit pace over the next five years, at least twice as fast as other sectors.
The cost of building data centres discourages speculative development. At up to $1,200 per sq ft, these cost some six times more to build than traditional logistics sheds. Most of this is due to power requirements, including back-up generators and cooling.
Low latency supply is most desirable. But demand should also rise outside of hubs, in locations that could be used to train large language models, for example, but not host AI services for users. An example may be the acquisition and development plans for the former site of UK battery start-up Britishvolt near Newcastle by Blackstone.
Crunching through terabytes of data will require lots of big data centres. Watch this space.
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