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Data Center REITs Paint Rosy Picture Even As Largest Tenants Slow Growth

Despite the slowdown hitting the cloud industry, the largest data center providers insist they aren't going to feel the pinch. 

A Digital Realty data center in Ontario, Canada.

Data center REITs Equinix and Digital Realty reported strong quarterly earnings figures last week, and their executives said they see robust revenue growth and an expanding development pipeline continuing into 2023.

These optimistic projections come despite the slowing growth of cloud providers like Amazon Web Services, Microsoft and Google, which are by far the largest data center tenants. These Big Tech companies warned earlier this month of a broad trend of businesses cutting back on IT spending. 

Yet leaders at both Equinix and Digital Realty say they don’t foresee any slowdown in demand in the months ahead, even as the broader economic climate remains uncertain. 

“As companies work harder for each incremental revenue dollar, digital transformation is seen as a critical driver of competitive differentiation, accelerating time to market and enabling product evolution,” Equinix CEO Charles Meyers said on an earnings call Wednesday. “Digital transformation is increasingly a means to do more with less, enabling businesses to reduce costs and drive operating leverage while simultaneously becoming more agile and responsive in serving their customers.”

In earnings released last week, Equinix reported its 80th consecutive quarter of revenue growth, with both quarterly and full-year revenues up 8%. Development capex grew slightly year-over-year to $748M as Equinix builds out 49 projects underway in 23 countries, the largest development pipeline in its history.

Digital Realty saw its quarterly revenue climb 11% year-over-year with record bookings in 2022 and 400 megawatts of new capacity under construction.

Looking ahead, both companies put forward optimistic growth forecasts. Equinix expects revenue to step up by nearly $1B in 2023 for a year-over-year growth rate of around 15%. Digital Realty also projected earnings growth at better than $1B, more than a 22% growth rate. 

These are rosy forecasts as the cloud service providers who use the largest share of data center space are seeing revenue growth decline. Hyperscalers said on earnings calls in recent weeks they are slowing the growth of their data center capex. 

Headwinds for the cloud industry would seem to be bad news for the data centers that host them, but executives at Equinix and Digital Realty insist that isn't the case. They said there is little evidence of any reduction in demand for data center leasing from the hyperscalers. And they argued that the cloud giants providing infrastructure as a service are far more vulnerable to customer cost-cutting than colocation data center operators like themselves, who host those same customers’ physical infrastructure. 

“Customers who have really significantly expanded their investment in cloud and the workloads they're moving to cloud, many of them have said, 'Wow, our cloud bill has gone crazy on us, and we really need to step back and take a look at that,'” Meyers said. “I do think that we see some of that dynamic. We actually see that dynamic, to some degree, playing in our favor.”

One of the appeals of using cloud services provided by the likes of AWS and Google compared to a traditional data center deployment is the ability to scale up or down instantly. By contrast, reducing a physical data center deployment can be a long and expensive process. Equinix’s leadership team said this is a source of stability for the company, which has more than 85% of its recurring revenues coming from companies with complex infrastructure across three or more data centers. 

At Digital Realty, Chief Revenue Officer Corey Dyer pointed to improved leasing numbers from enterprise customers with deployments of less than half a megawatt, a segment that is often a canary in the digital coal mine if demand is about to meaningfully decline.

“Demand remains as strong as ever,” Dyer said. 

Tenants Taking Rising Prices And Fees In Stride

Equinix and Digital Realty both said they are raising prices to account for skyrocketing energy prices and other inflationary pressures. Tenants seem to be OK with it, at least for now. 


Digital Realty saw pricing on new leases increase for the fourth consecutive quarter, climbing around 1.8% over the course of 2022. The company said it was able to negotiate inflation-linked rent escalators into around a quarter of newly signed leases last year.

Meanwhile, Equinix effectively raised rates for its existing customers in January, implementing a program in which the impact of rising power costs is fully passed on to tenants. It is a move that significantly increased tenants’ monthly bills in Europe and other volatile power markets but added around $350M to Equinix’s balance sheet. 

Leadership at both data center REITs indicated the higher pricing hasn't had any measurable impact on new sales or lease renewals. At Equinix, where the power pass-through charges are perhaps more likely to rile customers, the company said it launched an extensive communications campaign with tenants to make sure they understood the rate increases and weren't caught off guard. According to its CEO, no wave of resistance or protest materialized. 

“We've had a lot of inquiries. Most of those inquiries are simply about explaining and providing them additional information on the charges,” Meyers said on the earnings call. “To this point, we continue to feel very confident we're going to get full recovery of that. Right now, all systems go.”

Loudoun Power Crisis Not Stopping Digital Realty From Delivering Promised Capacity

Digital Realty executives said it will be able to meet all customer commitments in Northern Virginia that were in jeopardy following surprise power shortages in Loudoun County last summer. 

“We've continued to work constructively with the power provider in this market, and we are now pleased to be in a position to say that we fully expect to be able to deliver on the commitments that we've made to our customers within our development pipeline,” Digital Realty CEO Andy Power said on the company's Q4 earnings call.

“So, while conditions are far from business as usual in this market, we are encouraged by the progress made over the last 90 days and remain hopeful that we will continue to be able to work with a local utility provider to support the growing needs of our mutual customers," Power added. 

In July, utility Dominion Energy revealed it wouldn't be able to deliver power as promised to a number of data center developments in Ashburn’s Data Center Alley, with delays lasting until 2026. Multiple Digital Realty projects faced uncertainty, and as recently as November, the company said it couldn't guarantee it would be able to meet all customer commitments in the impacted area. 

Now, Power says the company will be able to meet its commitments that account for most of the roughly 80 MW of development in the impacted area. 

“We are good to go,” he said. “We're able to deliver for those customers, and there's no concerns about the power of being available.”