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Data Centre Investment Racks Up for 2023

The insatiable demand for data consumption continues. Driven by increased connectivity to devices, video content and OTT services such as TV on demand, consumers’ desire for more content faster, has been on the up-and-up for over a decade. SMEs and global organizations alike haven’t been able to secure data center space fast enough, with record global activity during the pandemic period and in 2020, Toronto recorded the second-highest data centre leasing activity in North America.

Cloud Vs Data Center Showdown

There’s no shortage of chatter over the past few years’ on the demise of the data centre (DC) and all hail the new king - cloud storage. Although cloud computing has brought with it a number of advantages for IT departments, in reality, it hasn’t been as simple as swapping one for the other.

The traditional DC provides a dedicated system that allows an organization complete control and management over its own hardware and data; a key benefit that may have prevented certain sectors (government, healthcare and financial, namely) from transitioning to the cloud.

Security and productivity are crucial considerations for businesses looking at how they store data and given cloud storage relies on an internet connection, adoption can open them up to security threats, relinquished control and for many, regulatory compliance challenges that prevent them from realizing the advantages and cost efficiencies that cloud has to offer.

There’s no denying the potential of cloud storage and its improved cost, scalability and capacity capabilities relative to physical servers. The future of the DC most definitely features cloud in a big way. No doubt it will complement conventional storage and now that the technology is no longer scarily new, we will see enterprises embracing private cloud or a hybrid cloud model which gives them the best of both worlds. Businesses will be able to choose which data sits in the public realm, what goes on a dedicated private cloud and what must be handled onsite.

That’s not to say that traditional DC won’t be growing in tandem as well, fueled by the quickening pace of artificial intelligence (AI) and big data requirements; data that is so fast, complex or varied that it can’t be accessed or stored by a single method. For those organizations dealing with data on this scale, and requiring the highest level of security, a customized, dedicated server solution can still be the most appropriate solution and this means that more DC real estate will be needed.

Data centers will continue to provide the infrastructure required for the management and storage of data in the cloud. All data and apps have to be stored on a physical device somewhere, if that’s not on your own personal device it’s likely on the server of your cloud storage provider (G Suite for example), but someone has space ringfenced in a DC somewhere for that particular data.

As consumption of data increases, particularly in regards to machine learning and the vast amount of data that needs to be processed, the coming years will see significant storage demand and much investment opportunity. These opportunities may be in data center investment itself or in some of the emerging technologies in the value chain.

Growth Prospects After a Decade of DC Growth

To recap briefly, we’ve witnessed steady growth in the DC market from 2014 through 2019, then as the pandemic hit, 2020-2022 proved an even bigger magnet for investors wanting to invest directly as data usage grew at a meteoric rate due to accelerated digital adoption brought about by COVID policies. Prices hit levels never seen before and competition was fierce. During 2022 data center M&A activity remained near record levels at $48 billion with private investment dominating the action.

There’s little sign of slowing overall in this segment thanks to some key drivers which will contribute to an estimated growth of 8.9% CAGR in Canada up to 2026 and over 20% growth globally, of which North America will contribute over a third. It may be that the big enterprise players that fueled demand in the last couple of years, dial back somewhat on their bullish and speculative acquisition but this will only present opportunities for other private investors to get a foot in the door on some of the development in progress.

Source: TechNavio. Accessed: 27.02.2022.

Toronto Trends Top of Mind for Investors

Many of the challenges facing the DC industry over recent years will actually be a source of opportunity for investors, particularly in Toronto. Energy consumption is a major downside to housing big servers, some of the biggest DCs consume the same amount of energy as 800,000 households. As data cenres manage ever-growing data usage, they will only get warmer, increasing the need for cooling. For IT departments, whether a hyperscale or seeking co-location facilities, sustainable premises will be front of mind.

Policymakers in Toronto are highly supportive of the development of free cooling data centres that use the moderate outside air temperature for cooling. The Canadian government has also made millions available to businesses in the form of grants, subsidies and tax incentives to promote clean technology initiatives. Aside from these incentives, Toronto is an attractive proposition given its relative abundance of renewable energy resources and of course, the second biggest cluster of tech businesses in North America with the potential to grow further along the Toronto-Waterloo corridor.

Of further interest to investors lies in ‘Edge Computing’. We mentioned earlier that not all applications are suited to remote DC services and the future years present a growing need to bring users closer to the data source, therefore reducing latency (the time it takes for data to reach the consumer). As 5G networks and the Internet of Things (IoT) become ubiquitous, there will be a need to create multiple smaller DCs on the edge of a network. In fact an edge computing infrastructure, including a supporting data centre, is the only option for many time-sensitive applications and emerging industries. For autonomous vehicles, drone management and healthcare, an edge data centre is imperative, life or death even it could be said.

Change is Growth for the Foreseeable

The data centre market is undergoing a period of transformation. Far from cloud computing spelling the end of the golden era for DC, it is, alongside several other advancements and technologies, enhancing the upwards trend for 2023 and beyond. The DC will continue to provide the foundation for a modernized approach to an organization’s data storage where businesses embrace the support of specialized third-parties to create and manage tailored storage. The sector will attract more and more investment with its steady, resilient cash flows both as a standalone proposition but also providing opportunities for diversification in the value chain through innovative redundancy and cooling technologies, renewable energy, cleantech and more.

The crippling supply chain challenges and inflationary pressure of the past couple of years may well ease the strain on new development costs as we head through 2023 and there could then be an end in sight for interest rate hikes. With little let up on office uncertainty this year, DC is a welcome beacon of light and will be preeminent in the minds of investors this year.

It has to be said however, data centre investment comes with its own set of nuances outside the typical considerations around location, price and tenants. Family offices will likely not enjoy the operational expertise necessary for successful investment, taking into account the distinctions from other investment types in regards to unique power requirements and measuring the risk of obsolescence of equipment, and indeed whether that equipment is the responsibility of investor or tenant. While the opportunity is big, there are many risks to consider and family offices should seek the advice of a qualified real estate professional in assessing all options.

Don’t hesitate to reach out to us for further insight into the data center investment opportunity in the GTA.

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