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Forecasting the future of the data centre industry remains challenging as it continues to grow. Gartner reports IT spending in 2023 to increase more than 6% YOY, accelerated by more requirements for software and IT services. As the stakes rise, the sector evolves at an increasingly rapid rate and so we are seeing a new set of themes starting to occur.
The shape of organisations is starting to change, in particular with sales teams. The scale, bespoke nature, and time taken to close deals have all increased and the associated skills required have moved to engineering led service teams now responding to customer enquiries and sales processes. Firstly, we forecast the end of the charismatic sales team.
There are also several other themes that GTR forecasts will keep recurring over the next few years.
Death of FLAPD obsession
Since 2015 Europe has witnessed exponential growth in take up. During the next five years, London and Frankfurt will continue to accelerate into their own premier league with the rest of Europe fracturing to provide centres of growth in more diverse cities. Some regions are already reaching oversupply and in smaller markets the supply and demand dynamics are a lot more sensitive - this will require more skill in navigating to achieve return on capital employed.
Energy Security Climate Silver Lining
For the European data centre industry increased energy costs will eventually feed into higher cloud computing costs for customers. Key variances in the cost of spot instances available in clouds already differ depending on geographical location of the server driven by a function of build cost of the facility and the cost of powering the server. This will force a new front in driving workloads to areas where power is cheap and stable.
In the medium-term countries will switch to more renewable sources for security of supply. This investment is likely to be state led, but partially funded by big tech to secure renewable supplies for their own use whilst sharing the benefits with local communities which they serve.
Regulation of Big Tech
Regulatory changes on both sides of the Atlantic may not appear to impact data centre demand, but it very much does. Tech firms may choose to limit the onshoring of content in certain parts of the world where laws are most stringent. GDPR regulation led to a boost in the European data centre industry yet just as easily, over regulation or perceived anti tech bills will push the industry away again.
The skills shortage continues. In an industry where the customer base becomes more concentrated the skill set required is more engineering led than ever.
Facilities Management engineering teams remain in peak demand particularly in hotspot markets of London and Frankfurt and growing markets such as Milan and Tel Aviv. Growth in the industry has
outstripped talent which promotes a threat to the quality of company performance in the sector and the quality of development.
Whilst there is still significant grey hair in the global industry to help currently there is a shortage of new entrants at every level. Yes, to training in schools, technical colleges, and Universities but also yes to more apprenticeships and encouraging cross fertilization from pharmaceutical and oil and gas industries that have natural similarities to the data centre sector.
For the industry macroeconomics has hit hard on multiple levels; raw materials and manufacturing cost increases and delays have hit construction costs, impacting rising rents and compression in returns for investors in the sector. Increased debt costs are likely to hit M&A, though the industry waits to see the effect. McKinsey reported 209 data centre deals in 2021 with an aggregate value of $48 billion (40% YoY). The first half of 2022 there were 87 deals with an aggregate value of $24billion. Whilst inflation will start to fall in 2023 financing costs will continue to impact deals and financing of new builds.
This is spurning more innovative companies to produce new contract structuring for clients and a more flexible approach to development that has made the industry feel less like tech and more akin to real estate development again.
Sustainability & Local Communities
Responsible industry wide education programmes for politicians and local government teams and continued industry led initiatives to invest and embrace local communities and use sustainable building practices will continue to be at the heart of new developments success. The industry is already driving efficiency in its facilities as a matter of contracting with its customers, what is more important is the quality of the envelopes being constructed, the energy sources being used and the overall sustainable approach to construction.
About the author.
Martin Carroll is recognised as one of Europe’s leading advisors in the data centre industry. He has in-depth knowledge of all aspects of the technical real estate market including investment, development, leasing and corporate data centre dynamics.