In this podcast, we explore some of the key predictions for the data center industry in 2023, including difficulty in delivery, pull back from larger users, lease price increases, international expansion, and secondary market growth. By understanding these trends, data center operators and businesses can better prepare for the future and take advantage of new opportunities.
Difficulty in Delivery
Data center delivery has become increasingly difficult in recent years. This is due to a number of factors, including the need for larger amounts of power, competition from industrial developers, and an unreliable supply chain. In order to bring 100 MWs to a data center site, it is not only necessary to secure the required power but also work around problems such as competing sites and the inability to deliver on promises.
As a result, more data centers are being built in areas with existing infrastructure that can support development more quickly. This has led to an increase in demand for these areas, making them harder to acquire for development purposes. All of this has made it difficult and time-consuming for data center operators to secure the necessary resources and bring power to their sites. This will lead to increased development timelines and likely higher lease rates, but presents an opportunity for companies that can bring supply to the market quickly.
It is likely that we will continue to see these challenges as data center delivery becomes more complex. To successfully deploy a data center, it is essential to understand the power requirements, secure land and resources, and work around competing projects in a timely manner. Therefore, data center operators must be prepared to face these challenges head-on if they want to succeed.
Pull Back from Larger Users
Over the last few years, data centers have seen a tremendous influx of growth due to the increased demand from large scale users. However, this growth is now starting to level off as economic conditions start to become a factor in decisions made by these larger users. We’re seeing a slight pull back from these largest users in the pace of their demand.
This means that there will be slower growth for the data center industry over the next few months, and other sectors such as banks, technology companies, and insurance companies may also pause in terms of their data center commitments. This could result in some fluctuations within the market and could mean that significant growth numbers may not be seen for a few months. Given the significant demand we saw in 2022, though, we believe this slow down will only be temporary.
Overall, this offers an opportunity for data center companies to adjust their strategies and focus on long-term growth plans that can help them weather any potential downturns. Through careful planning and analysis of current market trends, data center companies can make informed decisions to benefit their business and ensure continued success in the future.
The key takeaway here is that although there may be a slowdown in growth over the next few months, this doesn't necessarily spell disaster for the industry. With strategic planning and an understanding of market conditions, data center companies can prepare for any potential downturns and take advantage of future growth opportunities.
Price Increases on Retail, Wholesale, and Hyperscale
This year saw lease pricing increase in most markets, bucking a decades-long trend of price decreases as the industry matured and competition increased. We expect those pricing increases to continue. A few large operators have communicated that they are tying rent escalations and future price increases at the retail level to consumer price index (CPI) rates. This approach suggests the data center industry may continue on its current trajectory for the foreseeable future.
It is also worth noting that because building a data center takes a significant amount of time and capital, there is an inherent inertia in the industry. This is yet another factor that points to continuing increases in data center leasing rates over the coming years as the industry shifts to the changing landscape. For data center operators to stay competitive, it will be imperative to keep up with the latest technological, financial and management techniques.
Companies Expanding Internationally
In today's increasingly interconnected world, many companies are looking internationally to expand quickly and ensure long-term success. Merger and acquisition (M&A) strategies are an incredibly effective way of doing this, with corporations taking advantage of the expertise and resources specifically in international markets, where local knowledge and contacts are key to success. Building relationships with utility providers, navigating international regulations, and understanding the unique cultural factors of each region can be very challenging for those new to a market.
Furthermore, creating a global footprint enables operators to offer large customers a consistent product and experience at multiple locations across the world. We believe M&A will increase in 2023 as companies look to become truly global operators.
Secondary vs Primary Market Growth
In recent years, the demand for data center services has increased drastically. With the need to meet this demand, there is an acceleration of growth in secondary markets rather than relying on traditional primary data center markets. This involves developing sites from more remote locations that have yet to experience significant data center development.
Some of these secondary markets that have seen increased development include Minneapolis, Salt Lake City, Austin, and Columbus. Portland is another example of a secondary market that has experienced impressive data center growth in the past few years.
The reason for this shift to secondary markets is due to the need for more power infrastructure, better connectivity and lower costs when compared to primary markets. With the growing demand for data center services, it is likely that we will continue to see an acceleration of growth in these secondary markets over the course of 2023.
Overall, 2023 is shaping up to be an exciting year for the data center industry. And now more than ever, it is crucial for data center operators and businesses to stay up-to-date on these trends and developments in order to remain competitive and take advantage of new opportunities. By doing so, they can ensure success and continue to drive the industry forward. Check out our Insight tool to get deep analysis and trends updated each quarter on global data center markets.