Data center development drivers in Canada

Despite the close proximity to the US, data sovereignty, renewable energy, and large population centers provide distinct characteristics for major Canadian data center markets. As a result, Canadian markets continue to attract demand from enterprise users and cloud service providers, which are key to the country’s developing data center industry.

Cloud growth

Google, Microsoft, and Amazon have made significant investments in Canada. So far, most of the development has focused on Quebec due to the cheap renewable energy with the rest of the activity going to the Toronto area. Although leasing is a common option, most large cloud deployments in Canada are self-owned and operated.

Regardless of whether the data center capacity is leased or owned, as hyperscale companies increase their footprints, the concept of data gravity will lead to sustained growth as other data center providers and users attract to markets where there’s solid infrastructure in place.

Data sovereignty

One of the most important drivers in data center development is users' desire for data sovereignty. Canada’s privacy laws offer companies stronger protection, leading many international users to opt for a presence in Canada over the United States. This has shaped demand and transformed Canada’s data center market into an important location for international data center users.

How data center providers expand across Canada

In the United States, major data center providers often grow through new builds and expansions of their current facilities. By contrast, a higher degree of expansion in Canada happens through acquisitions, primarily due to higher barriers to entry and some unpredictability in the landscape.

Increased emphasis on acquisitions to facilitate growth

Portfolio consolidation is a common trend across the data center industry, with larger-scale companies utilizing mergers and acquisitions as a primary growth strategy. This is often the strategy of choice when a provider is entering a new country or region where they don’t have an existing customer base.

Even though mergers and acquisitions are not uncommon in the data center industry, the rate of acquisitions in Canada has increased over the past several years.

Some of the largest acquisitions over the past few years include:

• Equinix acquired Bell Canada’s 25 data centers across 13 locations
• Vantage acquired Hypertech's Montreal facility
• Vantage purchased 4Degress Colocation
• Compass Data Centers bought Root Data Center
• eStruxture’s acquisition of Aptum’s data center portfolio

Data center providers see acquisition as a preferential path to growth due to historically higher barriers to entry, unpredictability of the markets, and the increased risks of building speculatively.

Complex market characteristics created by historical high barriers to entry

Canada’s higher barriers to entry for data centers began with laws that enforced limits on international telecommunications companies. For example, telecommunications firms with more than 10 percent market share cannot have more than 20 percent of the voting shares owned by non-Canadians. In the early days when telecom companies dominated the data center infrastructure world, these regulations kept many United States companies (Verizon, AT&T, CenturyLink, etc.) from making much headway in developing data centers throughout Canada.

These early telecommunication laws kept the ownership of data centers in the 2000s through the early 2010s less centralized than in the United States, where a few telecom companies held bigger market shares. As a result, Canada’s data center industry was highly diversified in relation to its overall size, though only by Canadian telecom providers. This created a barrier to entry specific to the telecom industry and left a precedent leading to fewer US companies expanding to Canada through new development.

Unpredictability of the landscape

Data center providers also look to acquisitions due to the generally higher unpredictability of the Canadian data center landscape as compared to markets stateside. Toronto and Montreal specifically have shown volatility, showing signs of high or low demand before promptly changing directions.

In 2017 there were signs of major hyperscale leasing in Montreal and the surrounding Quebec market. Up to that point, there had been some hyperscale activity, but it was chiefly in self-owned and operated facilities. In the following years, however, only a few clients signed significant leases. Over the past year and a half, large vacancies generated from light hyperscale demand have led to delayed projects. While Montreal looked positioned to explode with growth in 2017, they seemed to have hit a more extended digestion period than expected leading into 2021.

In contrast, Toronto has been a hot market with one of the lowest vacancy rates in North America. The recent rush of demand left providers underprepared to serve the needs of users and are in turn focusing on land acquisitions to meet the growing demand.

Each of these markets' situations are relatively distinct. Providers usually have a solid understanding of the demand and are ahead of the curve when anticipating the market's needs. Although in the two primary markets, the situation has made predicting these markets more challenging than other markets.

Acquisition risks associated with building speculatively

As with most global markets, colocation providers can be hesitant to commit the capital required to buy land and develop capacity in a new country, with the risk of having un-leased capacity on the ground for an extended period.

Although the initial costs are higher, it's a much lower risk to acquire a facility that’s already stabilized from an existing provider. Entering a country through acquisition with anchor tenants already generating revenue enables immediate cash flow, and grants providers more time to familiarize themselves with the market before expanding in earnest.

With Canada being the most accessible country from the United States, it is a logical first step to begin with Canada for providers that would like to expand internationally.

Guiding data center acquisitions

The dynamics above have led to companies approaching Canadian markets differently than those in the United States. Considering the volume of financial backing coming into the industry purchasing assets, some companies view this time as an opportunity to sell their assets at a high value. Other companies see the potential still in its early days and will buy low with the anticipation of explosive growth.

When making these decisions, it’s important to seek analysis that’s based on a clear understanding of what’s going on in each market. Learn more about how datacenterHawk helps people get a clear view of data center markets in this short demo video of the datacenterHawk platform.