Data Centers Proliferate Despite Global Roadblocks – What is a Ground Lease?
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Barry B. LePatner Esq. Image courtesy of LePatner & Associates LLP
Think about how often you save an electronic file. Then consider how much data your company, your insurer, your medical providers, and your utilities need to store each year to run their businesses—and protect your data. Also consider the advent of artificial intelligence and the incredible new data storage needs that will face businesses who are turning to sites like ChatGPT, IoT (Internet of Things), cloud services, and data generation. Then you need to recognize that all this data must be stored on servers at data centers to be recalled at a moment’s notice.
This massive and growing demand for data storage has the private equity markets providing capital to fund construction of new data centers and expansion of existing ones. Demand from major users such as Amazon or Microsoft, Meta (Facebook), and Google are known in the industry as hyperscale operators. Mostly in obscure locations, these are massive facilities usually defined as exceeding 5,000 servers and 10,000 square feet of space, with the number of servers running into the millions.
In 2021, there were 209 data center transactions, with an aggregate value of more than $48 billion, up some 40 percent from 2020, when the deals were worth $34 billion. In the first half of 2022, there were 87 transactions, with an aggregate value of $24 billion. From 2015 to 2018, private equity buyers accounted for 42 percent of the deal value. Their share increased to 65 percent from 2019 to 2021 and to more than 90 percent in the first half of 2022.
The U.S. data center market size was $263 billion in 2022, and is estimated to reach $418 billion by 2030, growing at a compound annual growth rate of 9.6 percent during the forecast period 2023 to 2030, according to one industry report. Yet another industry researcher projects a CAGR of 10.9 percent during the same period but expected capital investment to reach $602.76 billion by 2030.
Global Challenges to this Emerging Market
Like other sectors of the real estate and construction worlds, data centers face challenges that could hamper some elements of the venture capital eagerness to fund future investments. These include:
Continuing supply chain disruptions, caused by the Covid-19 pandemic, on materials and equipment used in the construction of these projects;
Geopolitical conditions, such as the war in Ukraine, has limited access to supplies of neon (key for semiconductor manufacturing), continuing civil strife in the Middle East that threatens oil production, as well as uncertainty over the future of Taiwan where 95 percent of all microchips are produced;
The shortage of skilled construction workers needed for data centers’ complex mechanical and electrical assemblies;
Higher interest rates that threaten to remain at these levels for the near-term future; and
Meeting new standards of sustainability.
Water Demands Require Innovation
Building new data centers with green energy efficiencies is an industry-wide priority. A recent Gartner survey found that 87 percent of business leaders plan to invest more in sustainability to meet their environmental, social, and governance goals in 2023 and 2024. By using carbon offsets, Apple, Google, and Meta, were able to announce they were all carbon neutral by 2020. They and other hyperscalers have committed themselves to using only carbon-free energy by 2030.
Similarly, another major impediment for new development of data centers is justifying the large amounts of water needed to cool these facilities. Extreme heat and droughts in parts of the nation are raising the bar for data center developers. Adam Selipsky, the CEO of Amazon Web Services, recently noted that in just a few years half of the world’s population is projected to live in water-stressed areas. As such, to help ensure all people have access to water, there will be ongoing calls to innovate new methods of water conservation and reuse.
The capacity of a data center is a function of how well it cools the servers—the more closely they can be stacked, the more productive the square footage, the greater the need for efficient cooling as a crucial driver of a data center’s profitability. Not surprisingly, cooling accounts for some 40 percent of a data center’s energy consumption. As a result, data center owners and operators are looking to install air-cooled chillers that recirculate water in a closed loop, drastically reducing water use. But in other regions, they continue to rely on evaporative cooling systems that are highly efficient but require significant amounts of water.
The continued growth of data centers will accelerate advances in IT infrastructure, development of new generators and power distribution units, and new air-based as well as liquid-based cooling techniques. And the demand for highly skilled trades to meet these new design and installation requirements may well prove to be a major spur to the U.S. construction industry through the balance of this decade.
Barry B. LePatner, Esq., is the founder of LePatner & Associates LLP, and the CEO of Insights+ LLC.
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This property type is on the right side of secular trends, observes attorney Barry B. LePatner.
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In the simplest form, a ground lease is a long-term net lease (usually 49 years or 99 years) of land including any improvements on the said land. Assets that can be subject to a ground lease include but are not limited to, vacant land, office buildings, and large residential buildings.
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