A recent spate of activity from hyper-scale data centre operators and the continued race for space between the sectors major 5 operators, has once again piqued interest in the data centre sector. Although interest is growing and the market is particularly buoyant much of the Logistics and Industrial development community has limited experience of delivering such facilities. In this brief blog we look at key themes that are likely to shape the sectors evolution over coming years, and how the inter-play between data centres and the logistics and industrial sector is likely to play out.
Our 2024 C&W EMEA Data Centre Update, whilst finding that London remains firmly at the top end of markets listed with high capacity and maturity, suggests the next market phase is likely to see developers capitalise on the strategic opportunities offered by regional and secondary markets. A movement away from the capital for the data centre sector, mirrors trends previously seen within the Logistics and Industrial sector, and will result in fierce competition for land in well connected and densely populated regions such as the North West, South West and the Midlands.
What is a hyperscale data centre?
Hyperscale data centres are large facilities specialising in the provision of scalable data storage, distribution, and handling. These facilities are engineered to provide optimized network infrastructure with minimal latency and strong connectivity. Hyperscale data centres often from the outside often have a similar resemblance to large national and regional distribution centres.
Understanding demand: 3 Key Pillars of Demand
- A wave of new demand is being driven by AI learning centres, home-working habits, and significant growth in cloud computing and web-based software portals (SaaS industry). These structural shifts exacerbated by the Covid-19 pandemic, and lingering behaviours have resulted in a power grab by major operators within the United Kingdom, in turn inducing significant competitive pressures.
- Heightened concerns around data security, data governance, and cyber risk are driving renewed interest from major companies, and increasingly driving operators to look further afield to increase their handling capacity, and upkeep strict data governance.
- The modernisation of legacy facilities combined with new demand has resulted in an increase in market activity, with data centres and their supporting industries playing a growing role within commercial real estate. Data Centre technology moves rapidly, and as such older legacy sites can no longer deliver the capacity and power density required by new tech-start ups.
Quantifying Demand & Spatial Requirements: The Shape of Real Estate
Data from the VOA shows that the data centre market saw average annual growth of 1.5% in the years between 2005-2023, increasing the sectors footprint by a modest 3.8m sq ft. However, continued digitisation and significant structural change are likely to see huge acceleration as we approach 2040. Demand drivers such as the e-commerce penetration rate, digital literacy, and continued growth in cloud content services will require the market to grow at a rate of 4.1% PA, equating to the creation of an additional 16.3m sq ft.
Source: VOA & DCByte, 2024
The above chart looks at the listed MW capacity in the United Kingdom, relative to the total footprint of the data centre market from the VOA. The data shows over time how the sector has been able to intensify its capacity relative to its real estate footprint through efficiency gains. However, significant efficiency gains seen in recent years made through technology (from 2018 onwards in particular) are likely to be outpaced by the need for greater capacity, resulting in a significant requirement for more real estate to be allocated to the sector. The need for greater operational IT load and capacity within the UK also comes at a time where the Logistics and Industrial market also requires significant new space, with structural demand drivers likely resulting in the need for circa 30m sq ft of space to be delivered per annum in the period to 2040, further intensifying competitive pressures.
Understanding Supply: Challenges in delivering new space
Despite the significant need for data centre capacity, supply remains constrained owed to a number of factors. The development of data centres is highly specialised, requiring access to significant power supply, strategic location planning, and also must comply with a planning system that so far has had relatively little exposure to the sector.
Those sites that have recently been delivered or are under development have seen mixed results with teething problems and bottlenecks prevalent. These bottlenecks are attributable to a shortage of skilled contractors, significant delays in securing adequate power and water, and delays in the delivery of key M&E equipment such as gen sets, which alongside connectivity issues, further exacerbate the challenges in expanding data center capacity.
The combination of supply side constraints limiting new development, and a significant acceleration in required space is likely to drive innovation and re-purposing within the sector.
The case for re-purposing Legacy logistics and industrial facilities
Industrial assets can be one of the more feasible asset types for repurposing relative to other commercial property types. Industrial buildings have the large footprints, high ceilings, and robust structural frames that can accommodate the space and weight requirements of data centre equipment. Industrial buildings of scale, and legacy manufacturing facilities, also often have access to reliable and abundant power supply, as well as water sources required by data centre cooling systems. The strategic location of legacy industrial facilities also lends itself to re-development for use as a data centre, usually located near transportation hubs and densely populated urban areas, which can facilitate connectivity and latency reduction. As a result industrial buildings can offer lower acquisition and construction costs than greenfield sites, as well as aid shorter time to market, whilst offering location benefits.
However, repurposing industrial assets into data centres also poses some significant challenges and risks. For instance, industrial buildings may require substantial retrofitting and upgrading to meet the technical and operational standards of modern data centres, such as fire protection, security, insulation, ventilation, and cabling. Moreover, industrial buildings may face environmental and regulatory issues, such as contamination, zoning, permits, and taxes. Additionally, industrial buildings may have limited scalability and flexibility, as they are constrained by their existing layouts and designs. Therefore, careful feasibility analysis and due diligence are necessary to evaluate the potential and suitability of industrial buildings for data centre conversion.
Data Centres in Action:
Cushman & Wakefield represented Harworth Group in the sale of the former Skelton Grange B Power Station, along with the adjacent Knostrop plot, to Microsoft. Microsoft intends to build a hyperscale data centre campus across the 2 plots.
American Data Centre specialists DC Vantage recently purchased a former automotive manufacturing facility in Wales, acquiring the 1.6m sq ft former Ford production facility in Bridgend. The acquisition bolsters the Data Centre sectors presence in Wales, having seen DC Vantage acquire Next Generation Data in 2020, in turn taking over the management and operation of facilities in both Cardiff and Newport.
As well as major data centre operators a number of key commercial real estate players are already enacting their expansions into the sector, with a number of developers, operators and supporting sectors having been active in recent quarters.
Segros purchase of Bath Road retail park in Slough for £120.25m during 2023 crystalised the developers commitment to the sector. It is expected that the redevelopment of the site will likely include a significant allocation for data centre operators.
Specialised investment vehicles are also emerging with growing pace. Cyrus One, a data centre platform taken private by a joint venture between KKR and Global infrastructure partners purchased a 17-acre plot once earmarked for urban logistics usage.
Meanwhile within the Logistics and Industrial sector demand has also been registered for data centres supporting industries, with Modine recently signing for over 300,000 sq ft in Yorkshire. The American firm specialise in producing the HVAC cooling systems required to keep data halls operating effectively.
Data Centre Outlook:
The data centre market remains supported by robust occupier demand and a pressing need for greater capacity. However, supply side challenges and competition from the Logistics and Industrial sector is likely to intensify competitive tension in the market resulting in data centre clustering in key regions such as the Midlands, South West and North West.
Such severe supply side challenges mean that the data centre sector will likely be required to scale using a variety of development and re-purposing methods. And whilst the re-purposing of legacy logistics and industrial facilities has been seen many times, the changing requirements of the modern data centre market and increasingly complex specifications are likely to challenge the future viability of redevelopment. Some capacity gains are likely to be delivered at the smaller end of the market in the short term. However, it is likely that evidence of co-placement within regeneration and mixed-use developments will be limited to smaller facilities.
There is strong potential for converting land banks on the urban periphery to data centre usage, although this will require greater support and understanding from planning authorities. The re-positioning of existing logistics and industrial assets for data centre use is a strategy that is gaining momentum, although understanding of market dynamics within both sectors are key to unlocking opportunities, and whilst some benefits of redeveloping existing sites are attainable, detailed feasibility analysis and due diligence are required.
