‘Are We In Trouble Now?’ Data Centers Are About To Finally Feel The Supply Chain Pinch
The crippling supply chain crisis has mostly known no barriers with nearly every sector of global commercial real estate feeling the lash at some point — save one: data centers.
But that's about to change, and the data center industry knows it.
But with supply disruptions showing no signs of dissipating, some industry insiders say the impact on data centers could be dramatic in 2022 with delays and rising costs on the horizon.
“There’s a lot of uncertainty. Are we in trouble now? Are we not in trouble now? Because projects aren't stopping and everyone's still full speed ahead on development and they're buying land,” said Kevin Imboden, director of research for Cushman & Wakefield's global Data Center Advisory Group. “We’re trying to ascertain if there’s going to be a hiccup at some point.”
The data center industry is in the midst of a building boom, with facilities that require an enormously complicated, time-sensitive international supply chain for highly specialized equipment ranging from servers and network gear to generators and cooling systems.
At first glance, data centers would seem to be highly vulnerable to the supply chain disruptions that have driven inflations and made goods from bikes to building supplies hard to come by. Yet, through 2021, the industry’s major players indicated that they were managing to navigate these issues with little in the way of construction delays or dramatically increased costs.
“We’ve seen no major delays today with delivering new capacity, despite general market concerns related to supply chain challenges,” said Equinix Chief Financial Officer Keith Taylor, speaking on the company’s Q3 earnings call in November.
So why has the unprecedented data center rollout continued unimpeded despite the global supply chain crunch?
Exports point to a number of reasons.
Driven by the need to meet the rapid scalability demands of the major cloud providers and other hyperscalers, data center companies were already pouring resources into measures to ensure they could anticipate and meet these needs. Before the pandemic struck, many companies had already implemented sophisticated demand modeling, were stockpiling equipment with long lead times and had ensured multiple suppliers for each component.
“The industry moved from working on a ‘just in time’ basis to a ‘just in case’ basis,” said Jonathan Atkin, who heads the Communications Infrastructure Investment Research practice at RBC Capital Markets. “If you continue to operate on a 'just in time' basis, then you’re more likely to be experiencing these challenges.”
Large data center providers like Equinix have remained relatively insulated from the global crisis due to their purchasing power, as suppliers prioritized their largest customers. This is perhaps illustrated most acutely by hyperscalers like AWS, Microsoft and Facebook, which have aggressively expanded cloud computing amid a global chip shortage. Meanwhile, relatively small microprocessor customers like the auto industry were cut off.
Forced to compete against this kind of purchasing power, many smaller data center providers had to get creative to avoid disruptions. Instead of continuing to use the same vendors and off-the-shelf equipment as other data center companies, Las Vegas-based Switch began designing its own custom equipment, ensuring that the company wasn’t competing for the same manufacturing production slots as the major cloud providers.
“I’ve changed all the designs of manufacturers 100 percent, just for us,” said Switch CEO Rob Roy, speaking on an investor call late last year. “No one can come and take my air conditioner slots because those factories only make them for us.”
While data centers have managed to weather the supply chain storm so far, some industry observers say that things may get worse before they get better. As supply chain disruptions continue longer than anticipated, there are indications that delays could become more widespread in the months ahead.
In its 2022 data center real estate outlook, CBRE projects that materials shortages and increased shipping delays could impair data center development and new supply, as well as refresh cycles for existing data centers.
According to the report, the increased costs associated with these delays could drive up rents in certain markets by as much as 6%. And while there isn't universal alarm across the industry, experts tell Bisnow that many suppliers are reporting growing problems.
“Some companies up and down the data center supply chain did indicate that shipments they needed, or shipments of their own equipment are encountering delays and that issues with the availability of their downstream suppliers have been exacerbated since October,” RBC’s Atkin said.
“This is something the industry is going to continue to grapple with.”
F5 Networks, a supplier of networking equipment to data centers, is feeling these problems acutely. François Locoh-Donou, the company’s chief financial officer, said the company will not be able to meet its order commitments for 2022 and painted a dire picture of a deteriorating supply chain on the company’s earnings call last week.
“Things have been getting worse,” Locoh-Donou said. “Over the last 30 days, we have seen a steep decline in the state of component availability from a number of suppliers. And that's what's caused us to relook at the view for the year and see that we wouldn't be able to even ship the systems that we have planned to ship for the full year.”
Locoh-Donou indicated F5 had also been forced to redesign products to be built with more widely available parts. And while the company previously had been able to find other parts on the open market in a pinch, over the past month those opportunities have dried up — suggesting that the problems F5 faces are widespread.
“I think everybody is in the same situation,” he said.
Beyond creating delays bringing new facilities online and driving up costs, experts say supply chain disruptions could create — or at least accelerate — broader changes in the data center landscape.
Some analysts point to the tight supply chain as a contributing factor in the wave of M&A activity sweeping across the sector, as firms look to consolidate to increase their purchasing power.
Equipment shortages have also been a boon for companies who salvage and resell used equipment from decommissioned or refreshed data centers, as some companies are forced to settle for older, lower-performing equipment rather than no equipment at all. Similarly, there is speculation that these conditions could boost the market for older legacy data centers that currently fetch little interest.
“Maybe it's not custom-built to what you want or have the best efficiency, but there are empty data centers in this country all over the place,” Cushman & Wakefield’s Imboden said. “It’s possible this will lead to interest in some of these older, 20-year-old buildings that have a lot of needs just because it’s easier to deploy there instead of trying to wait out the supply chain issues.”