What Recession? For Data Center Firms, It’s Full Steam Ahead
The COVID-19 recession has had a complicated impact on data center real estate, and firms are adapting quickly to respond.
Unlike past downturns, the current recession comes with an ongoing health crisis and a sudden shift to remote work, in addition to swift changes to U.S. fiscal policy as the country pushes to recover. For the data center industry as a whole, the sharp rise in remote work and schooling has accelerated already-strong demand for data storage and processing.
“People working from home put a spotlight on the distributed workforce and cloud services, and that’s why you’re seeing such strong investor interest,” said Pat Lynch, senior managing director with CBRE’s Data Center Solutions group.
That’s reflected in the stock performance of the largest data center REITs this year, which have far outpaced overall gains in the market. The two REITs with the largest market capitalizations, Equinix and Digital Realty Trust, have delivered year-to-date gains of 46% and 28%, respectively, as of this writing.
The sharp recession this year has also brought some of the lowest interest rates in years, and some major data center players are taking advantage of a favorable moment in time for fundraising. Another colocation provider, Stack Infrastructure, raised $325M in securitized debt last month, at an uncommonly low interest rate of 1.893%, the lowest securitized rate seen in the history of the data center industry.
The recession has not slowed demand in Loudoun County, Virginia, dubbed Data Center Alley for its high density of data center activity.
“Data center development is at an all-time high this year with more than 6M SF of new space currently under development,” added Buddy Rizer, executive director of the Loudoun Department of Economic Development. “I’m proud to say that our team in Loudoun has met the challenge, executing more fast-track projects than ever, most of them on time or ahead of schedule.”
That’s not to say there haven’t been bumps in the road for the industry.
The pandemic triggered construction delays at several large sites, including Facebook’s planned $750M data center campus in Alabama. In a May survey of IT managers by the Uptime Institute, 45% of respondents cited delays in data center build-outs as their top concern.
Like countless other businesses this year, colocation providers also had to rapidly pivot their operations to meet both health standards and a surge in demand due to remote work.
Ed Henigin, chief technology officer of Texas-based Data Foundry, said that the company made a number of “tactical” changes to its operations, such as spinning up new virtual tours of its facilities to prospective customers. But even with in-person visits stymied, Hengin doesn’t see any extended impact to Data Foundry’s business from either the pandemic or the recession.
“The COVID impact on the economy is real, but it’s a speed bump,” Hengin said. “There have been organizations out there that would have been data center customers and froze their capital budgets. That slowed down some work, but what we’re seeing in the market already is that everything is coming back.”
As the recession unfolds, consolidation trends in the industry may particularly favor sizable, well-capitalized players with the ability to pivot quickly and to continue their pace of investment.
In the first half of 2020, notable deals included Mapletree’s $557M acquisition of a 10-property portfolio from Digital Realty, Equinix’s $175M acquisition of three Axtel data centers in Mexico, and Landmark Dividend’s $122M buyout of PayPal’s 184K SF facility on a leaseback basis.
By contrast, smaller data centers with aging assets may not fare as well amid an ongoing flurry of deals.
“Some of the assets that are older in age, or smaller in size, may not have a place in the data center space. So we’re watching that cautiously,” Lynch said.
There’s another side to rapid growth in the data center industry that could pose a challenge in the coming months: a scarcity of talent. Demand is sky-high for experienced talent across many facets of the business, Lynch added.
“As the industry continues to grow, talent remains a challenge, whether that’s the operations side or the transaction side,” he said.