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JLL’s Data Center Outlook: A Wave of Global Momentum in 2017

24 February 2017
JLL Outlook - Cloudscene Review

The highlight of the 2016 year for many in the data center sector was the record-breaking US $1.7b in mergers and acquisitions. The year boosted the industry’s optimism at a time of significant change in terms of regulatory and economic policies, flexible pricing models and increased strategic cloud adoption.

Whilst the data center industry overall is expected to continue to thrive in 2017, global real estate services firm Jones Lang LaSalle (JLL) warns that data center operators will need to be smart, strategic and move quickly if they’re to remain ahead of the game.

JLL recently released their 2017 Data Center Outlook report which discusses the evolving political, economic and technology changes that are fueling global data center growth.

According to JLL, these are the top five data center trends to watch this year:

  1. Major M&A disruption will lead to the big players getting bigger, whilst newcomers will struggle to get off the bench
  2. Shifts in global policy and economic trends thanks to the new US administration and evolving data sovereignty laws will create change and uncertainty for the sector
  3. Cloud adoption is shifting which data centers host data and where, with growth hub markets such as Silicon Valley, Northern Virginia, London and Japan moving swiftly to the cloud
  4. Retail pricing will be moving out and wholesale pricing moving in thanks to the rise in interest in hyperscale sites
  5. Data center REITs are rewarding investors handsomely with double digit returns, resulting in considerable interest over traditional funds.

The 2017 Data Center Outlook report goes on to suggest that the hunger for data and the cloud will persist even if the global economy slows. This is driven in particular by the increasing demand for more intelligent and advanced data center solutions.

Nearly three quarters of enterprises are actively preparing for Internet of Things (IoT) initiatives, with investments in smart office devices expected to grow by 33% this year alone. The IoT, together with new technologies from major cloud providers like Microsoft, Oracle and Amazon, will drive businesses to the cloud at a record pace.

Mergers and acquisitions will continue to be plentiful and are expected to well and truly exceed last year reaching the US $7.1b mark. This is mostly thanks to Equinix agreeing to acquire 24 Verizon sites for US $3.6b and CenturyLink selling its data center portfolio to a group of investors for US $2.3b. Other colocation companies such as Vantage and Cologix are also on the market and “generating huge interest”.Cloudscene Data Center News - JLL Report

JLL states that constantly evolving global policies will trigger questions around taxation and data sovereignty. Specifically, new Canadian laws mandate that data belonging to Canadian companies must reside on Canadian land. This poses a question over the quantity of US-hosted data that will migrate to the Canadian cloud.

Likewise, Russia has tightened its data sovereignty laws, decreeing that personal data submitted by Russian citizens must be stored within its borders. This has created a logistical nightmare for organizations such as LinkedIn, whose service has been blocked in the country since November for failing to transfer Russian user data to its national servers.  Interestingly, the social network was more compliant in China, opting to build a completely separate site with all data hosted in-country to ensure compliance with similar regulatory requirements.

Other game-changers include the new US administration and its influence over energy/environmental regulations. New US guidelines relating to energy metering and efficiency are due to come into effect in 2018, and these measures will certainly impact the data center sector which is known for its carbon footprint equivalent to the airline industry. Privacy concerns under the new US government could also motivate a move to data center facilities in seemingly ‘safer havens’. And whilst the Brexit fallout won’t be fully understood until London’s data center industry formally separates from the EU in 2019, some change is inevitable over the next twelve months.

JLL expects to see an acceleration of cloud adoption in 2017, with several service providers anticipating a need to triple their capacity by 2020. Specifically, the demand for hyper-scale and hybrid cloud solutions is surging for those facilities located in low tier and highly populated markets outside the traditional hubs.

The report suggests that the major US breakout markets of 2017 will include the Northern Virginia, Northern California and Chicago markets, where a combination of new infrastructure, hyper-scale facilities and competitive prices will entice users away from legacy data centers. Furthermore, Dublin will continue to be EMEA’s fastest growing market, with total supply expected to reach 100 MW this year. Montreal and Tokyo will also see significant expansion in 2017, driven by tech giants: Microsoft, Amazon, Amazon and Google.

The industry is witnessing a seismic shift in contract terms, with substantial downward pressure on wholesale costs, which are no longer the sole domain of large operators. Projects as small as 10 racks, or 75kW, now enjoy bulk pricing, which would have previously been priced at retail rates. Data center customers are also benefitting from improved leverage when negotiating terms relating to scalability and flexibility.

The growth of the digital economy is broadening investment interest across Wall Street thanks to the success of data center Real Estate Investment Trusts (REITs). The funds are attracting investors particularly due to their double digit returns over the single digit offering from other comparable funds. Despite a slight fall in investor confidence following the US election, spirits have subsequently lifted and strong dividend yields are indicative of another year of solid growth. The seven publicly traded US data center REITs are Equinix, Digital Realty Trust, CoreSite Realty, QTS, CyrusOne, DuPont Fabros Technology and Iron Mountain; and all reportedly outperformed Standard & Poor’s 500.

Overall, JLL’s Data Center Outlook report points to considerable confidence and optimism in the market. And in spite of the tremendous change the data center industry is currently experiencing, the sector is seemingly well prepared for what lay ahead in 2017. Those data center operators and service providers that are able to move quickly in the face of change and deliver data facilities faster and more flexibly than ever before certainly have an exciting future ahead.

Original sources:
http://www.us.jll.com/united-states/en-us/research/data-centers/trends

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