JLL recently brought together top data center thought leaders to discuss the main factors affecting the industry at its 2022 Data Center Forum. Held in Park City, Utah, the key insights gained from the forum include carbon accounting, sustainability, infrastructure challenges in emerging markets and investment appetite.
“The overall goal of the Data Center Forum was to create an environment to define issues impacting the industry and educate, collaborate and challenge the way we deploy and operate data centers today,” said Brian Kortendick, JLL Executive Director, Global Data Center Strategy. “Sustainability is at the forefront of industry challenges, we all, together, need a concentrated effort to develop new concepts, practices and innovative approaches to achieve sustainability goals.”
You cannot measure what you cannot define
Like other commercial real estate asset classes, data centers all have high initial carbon output. With its high reliance on power consumption, the ongoing operational carbon output is materially higher, thus data center owners have an obligation to invest in sustainable ways of doing business. Carbon accounting, or greenhouse gas accounting, is how organizations quantify their greenhouse gas emissions, and carbon tagging – which summarizes the GHG data – as a practice will be an essential part of carbon accounting moving forward. JLL recommends that all organizations prepare for this new process.
Sustainability is fast becoming a primary driver for data center site selection, design, build and operations. Recently, 96% of 50 of JLL’s clients have defined sustainability goals, but only 19% have publicly committed and funded execution plans.
“Whether self-regulated through something like the iMasons Climate Accord or more strictly regulated through the SEC in the U.S. and the Corporate Sustainability Reporting Directive in the EU, the industry will soon have much more robust need for sustainability assessment, accounting, reporting and monitoring,” said Sean Farney, JLL Executive Director for Data Center Strategy and Innovation.
Adapting and/or optimizing existing processes for sustainable operations
Because the data center industry is astute at being able to continually adapt and improve, it can excel at sustainable operations, and all operational elements within the data center space represent sustainability opportunities. Companies must first assess their entire mechanical and electrical plant and take advantage of reliability-based maintenance that structures asset replacements and investments toward operational objectives that materially overlap with driving sustainability goals.
“The tradeoff between investments in sustainable objectives and revenue-generating assets for companies will always be a challenge,” added Daniel Kirschner, JLL Head of Growth and Business Development, Work Dynamics. “The key is strong governance with top-down support and initiatives that take advantage of both increasing reliability and reducing carbon output concurrently. Both objectives can go hand in hand with a proactive, and predictive, maintenance and replacement approach.”
Powering through challenges
JLL’s recent Data Center Outlook discussed emerging markets and how absorption has reached new records in the U.S., with hyperscalers driving the demand and creating fierce competition in the market by paying top dollar to secure sites. This has also led to an imbalance between supply and demand.
Emerging markets are adding new supply, as the top geographies are facing challenges with land availability, unpredictable construction costs and power delivery delays. Supply chain challenges are also creating record lead times on delivery which has further constrained market supply and driven significant preleasing. With limited availability, rental rates have increased 20 to 35% in most major markets.
“Power supply is critical and having access to power secured in time with delivery will drive success in leasing, as data center users need speed to market and confidence in delivery in order to commit,” said Amber Schiada, JLL Head of Americas Data Center Research.
New investors bet on data centers
The investor landscape for data centers is both diverse and requires specialization, but a paradigm shift has emerged versus five years ago with more and more institutional investors coming to the table and an abundance of available capital attracting new entrants, including private equity. Additionally, sustainable financing is gaining traction and can have a 200-basis point impact on financing. Interest rates have not yet impacted expected cap rate returns for data centers, primarily because the financing decision is often separated from the long-term revenue play for a data center operator.
“The capital appetite towards data centers far exceeds the volume of opportunities,” said Carl Beardsley, Senior Director, JLL Capital Markets. “The volatile debt markets have impacted commercial real estate valuations across all asset classes, but data centers are viewed as resilient, high-yielding investments and will continue to remain in high demand.”
There’s a healthy mix across the market for speculative versus build-to-suit investments. Spec developers are getting sites “pad ready” with infrastructure but are waiting to build vertical until a tenant is secured. Alternatively, developers will build the shell but wait for a tenant for their unique fit-out needs.
“The size and velocity of recent leases being completed has led to significant availability constraints that will only get worse in 2023 across most of the major markets,” said Andy Cvengros, JLL Managing Director. “This will be exacerbated by limited available land for development, transmission power delivery lead times and product availability. We expect some relief in 2024; however significant preleasing will continue to drive issues in capacity pipeline projections moving forward. We should see new submarket expansion and further secondary market development to alleviate the constraints.”
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About JLL
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $19.4 billion, operations in over 80 countries and a global workforce of more than 102,000 as of June 30, 2022. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.