'The Devil’s In The Details': How CRE Discovered New Revenue In Edge Data Centers
As traditional asset classes continue to struggle amid the coronavirus pandemic, property owners are beginning to train their eyes and dollars on something they typically never touch: digital infrastructure.
While the ongoing global digital transformation has created a building boom for massive data centers measuring millions of square feet, it has also boosted demand for so-called edge data centers at the other end of the size spectrum.
While most interest in data centers from commercial real estate is focused on large projects with thousands of server racks, some major players across other asset classes are beginning to hone in on hosting edge facilities — units that in some cases are no larger than a washing machine or a shipping container.
But despite widespread interest, adoption has been slow, and experts warn that CRE professionals unfamiliar with digital infrastructure shouldn’t look to edge data centers as a quick fix for a struggling property.
“There are definitely a lot of high-level conversations happening about this globally,” said Sean Mulligan, director of data centers and mission critical at PCL Construction. “It’s an idea that’s easy to visualize, but the devil’s in the details, and for any property, there are going to be a lot of questions about what it would take to make this work.”
The so-called edge is a loosely defined piece of industry jargon, but in its most general sense, the term refers to data processing and storage taking place on servers close to the end user of that data — rather than in a potentially distant data center hub.
Why does this matter? The most frequently cited benefit of edge computing is low latency, which is tech-speak for reduced computing time. Edge computing provides lower latency because data doesn’t have as far to travel and because it is not competing for bandwidth with data from millions of other users on major national fiber optic networks.
The low latency ensured by edge processing is increasingly necessary for a range of applications, from self-driving cars and trading software to streaming services and gaming. Demand for edge is also increasing due to a flood of data from the Internet of Things — information sent constantly from an ever-growing number of internet-connected household appliances, vehicles and industrial systems.
As a result, there has been a broad decentralization of digital infrastructure, with a growing percentage of data processing and storage moving toward the edge and a growing need for small data centers close to commercial users.
Industry insiders say investors and developers of commercial properties are beginning to look to edge data centers as a new use for underperforming properties, particularly as the market for office space faces significant uncertainty in the wake of Covid-19.
In urban central business districts, technology parks or other areas with a high density of businesses with significant computing needs, edge data centers could provide new revenue streams for property owners willing to make the upfront investment needed to host these facilities in unused offices, utility space or on rooftops.
PCL’s Mulligan said office conversions were the subject of a call with executives at CBRE over the past week, and leaders in the edge computing space tell Bisnow they’re seeing growing interest from REITs and other large property owners across different asset classes.
“The property guys are now realizing they can pull revenue from this,” said David J. Keegan, CEO of DataQube, a U.K.-based provider of customizable edge data centers. “There’s going to be a lot of repurposing of buildings, and they’re trying to figure out how to get data centers into their portfolio."
Last month, DataQube announced it would be a partner in the partial redevelopment of a tech campus in Basingstoke, England. DataQube’s edge processing units, which are capable of being configured in various shapes to fit into interior spaces that would not normally accommodate a data center, will be deployed in two buildings due to be offered as research and development and office space by Glendine Development.
According to Keegan, the capacity for edge computing is foundational to the business model of the Basingstoke project, not just a way to milk extra revenue from the property. The developers hope the data center infrastructure will be a sweetener for tenants who want on-site computing that can be managed by a third party and deployed in days, not weeks. DataQube can provide that server space and use the additional capacity at the site to provide edge services to other customers in the area.
“We’re repurposing the building using an edge data center solution, but we’re also then reimagining the traditional model for office space,” Keegan told Bisnow.
Despite the reported interest in conversions and other methods of incorporating edge into commercial properties, few conversions or projects like DataQube’s Basingstoke development have come to fruition.
Although some edge providers like Dallas-based DartPoint have successfully placed their edge data centers into office space, such examples are rare. And industry insiders say that any interest in edge from outside data center circles is a very recent phenomenon.
“We’ve actually had conversations over the past couple of years where we’ve said, OK, Mr. Office Building Owner, you have 20% vacancy, what if we were to tell you there might be an edge play on top of your roof and you might get some rent out of that, but you’d have to fix some of the infrastructure in the building,” said Kevin Imboden, director of research at Cushman & Wakefield’s Data Center Insights group.
“Universally, they all said, 'no,' but where do you expect to fill a 20% office vacancy? These are the kinds of upgrades you can do that will intrigue certain tenants to come in.”
Imboden points to multiple factors behind the reticence of many property owners to embrace edge infrastructure despite what he characterizes as a strong business case, most significantly a general lack of familiarity with data centers and digital infrastructure trends among property owners and commercial management firms.
He also said that while firms like Cushman & Wakefield may have a strong business case for these edge deployments, so much capital is currently flowing into massive data center development projects that it doesn’t make sense to devote time and resources to push an idea that’s getting resistance when people are banging down your door trying to make hyperscale deals.
But even as the idea gains traction, there are more concrete logistical reasons why property owners have been slow to implement edge solutions, according to Imboden and others who spoke with Bisnow. Deploying an edge data center isn’t as simple as rolling in a modular unit and turning it on, and the appropriateness for a data center on a certain site depends on both the building itself and the planned use of the data center.
A building’s location, design, access to power and fiber, and even its security all factor in whether it is well-suited as a data center site. So too does the specific use of the data center: an edge facility used to quickly process financial transactions has different computing, security and uptime requirements than units controlling hospital equipment, hosting edge colocation or any number of other edge applications.
“There’s not a one size fits all,” PCL’s Mulligan said. “For a landlord with a vacant office property who’s thinking they can repurpose it and make it attractive for leasing for data center purposes, they need to think about what’s actually going to be processed there and about their property’s selling points in terms of space, power, whether there’s natural disasters in the area, what their redundant power equipment is, among other things.”
Other experts point to the fact that certain applications for many edge data centers on the market are relatively unproven, and that with so few actual edge data centers deployed in office spaces and other commercial environments, their reliability can be called into question — a major strike against a piece of mission-critical infrastructure.
Still, both Mulligan and Imboden see a future where edge data centers are regularly incorporated into commercial properties. As network improvements like 5G and new last-mile fiber enable technologies like smart cities and self-driving cars that rely on edge data centers, demand for these facilities is only going to grow, experts say. With a wave of interest from companies with some of the largest real estate portfolios, those trying to maximize revenue from commercial properties may want to start familiarizing themselves with digital infrastructure at the edge.
“The industry needs to be educated on the capabilities of edge,” DataQube’s Keegan said. “If they’re not looking at having some form of technology solution on-premises, they’re going to get left behind.”