The stratospheric rise of the cloud over the past few years caught many off guard and created an arms race among the cloud providers, with data center development underpinning the effort.
These cloud providers were anticipating ever-increasing demand for the cloud by globally creating a robust and redundant network of massive data centers tethered together through a network of smaller data centers and fiber connection locations. Data centers that service other segments of the market (wholesale colocation, “edge,” and retail) were also riding the wave of increased demand. Little did we know a global pandemic would make data centers and the cloud even more critical.
The sudden and unforeseen COVID-19 crisis revealed what was becoming obvious — technology has infiltrated almost all aspects of our lives and created more and more data that needs to be processed and stored, optimally in a purpose-built data center. Instantly, a massive slice of workers around the globe were working from home and needed to stay as productive as before. Patients could no longer visit their doctors in person, so telemedicine use exploded.
Students were taking virtual classes that were never anticipated, and school districts and universities were flat-footed on how to accomplish this. Social media use greatly increased because of social distancing requirements and the desire to still be connected. Physical retail locations closed so reliance on e-commerce continued its upward trend.
All of this happening simultaneously put massive pressure on the existing IT infrastructure. Companies that were taking the cautious approach to using the cloud now have no choice but to embrace it further because they cannot scale up internally quickly enough. The cloud offers a great deal of flexibility (scope of use, pricing, AI, etc.), but once workloads are in the cloud, it may be difficult to get them out. Workloads can be moved to the cloud in a matter of minutes, whereas leasing/licensing data center space (with fit out) can take many months.
For these reasons, COVID-19 has benefitted the cloud more than the wholesale/edge/retail leasing/licensing market, and the more workloads that go into the cloud, the less that go into the leasing/licensing market. When the COVID-19 crisis is resolved, some of this demand may abate, but permanent structural changes will remain that will continue to drive increasing data center demand.
Companies that were taking the cautious approach to using the cloud now have no choice but to embrace it further.
The cloud is an excellent technology solution in many cases but not all. Healthcare providers and financial institutions must abide by various privacy and security laws and are subject to stringent regulations so some of their IT functions cannot solely reside in the cloud. For these reasons, leasing/licensing data center space is still a major part of the IT strategy for most larger companies.
Prior to the pandemic, companies were seeking to monetize their owned data centers by selling them to a data center provider and leasing part of them back. These transactions create immediate supply in a market as compared to the 12–18 month build cycle for data centers. Data center providers may now more aggressively court these types of deals to create an instantaneous attractive array of data center supply in various markets.
Wireless 5G and smart devices/automobiles were supposed to be the next major demand driver but COVID-19 temporarily stole their thunder. Those technologies are coming on fast though and will create another wave of demand. With the emergence and normalization of data centers as an asset class, the more conservative institutional real estate investors and lenders, who have been on the sidelines until now, will enter the market as well. Once that happens, data centers will finally take their place in the first tier of real estate asset classes.