Data Centers: The Hubs of Digital Infrastructure

Hyperscale providers tend to cluster in specific areas around the world, including Northern Virginia in the United States, London in Europe, and Singapore in Asia Pacific. There are a variety of reasons for this, ranging from the need to be physically close to important connections and to transmit at high speeds, cloud architectures that require multiple independent nodes in close proximity, and a concept called data gravity, in which applications, services, and data tend to gravitate toward areas that are already storing and processing large amounts of data. Data gravity is intensifying exponentially and increasing compute and storage demand in the incumbent hyperscale markets, which have finite space and power—two elements that data centers need in large and scalable amounts. This structural scarcity provides a potential opportunity to invest both in the data centers themselves and the services supporting their operations.

AI and other trends may continue to open up demand in new markets and for different types of facilities. For example, data centers used for different purposes may have different requirements:

· To train an AI, data centers need enormous amounts of computing power, but have a lesser need to be close to large population centers than a data center used in cloud computing.

· For AI inference models, which solve problems or create predictions, data centers need to be both very close to end users and to experience low latency, or delays in transferring information.

Therefore, data centers that focus on AI training may be in more remote locations, ideally close to cheap and plentiful power sources, while those that focus on inference may need to be located near application users and commercial centers.

Looking ahead, next-gen applications, including augmented and virtual reality, the internet of things, and of course, the evolution of AI, should further expand the need for data centers and the functions they serve. Edge data centers, which are located near the enterprises they serve, could become more prevalent.  That said, we believe it remains unclear whether demand for edge centers will materialize at any significant scale beyond major metropolitan areas.

The Ingredients for Success in Data Centers

Data center investments have many attractive aspects, including incredibly strong demand growth and an upper limit on supply due to scarcity of space and power. However, not all data centers are created equal, and broad exposure does not guarantee investment success. We think three key principles can help secure a differentiated risk-return opportunity.

1. We cannot stress enough the value of technical expertise and experience. The hyperscale players that are the largest customers for data centers are also the world’s most advanced consumers of the product. These customers are extremely selective about the vendors they use and are also discovering that there may be cost benefits to consolidating the number of relationships they have over time. Strong relationships with these players, as well as a demonstrated track record of success adding value for customers by building and operating data centers, has been key in our experience to winning trust and repeat business.

2. Knowing how to value these investments is also critical. We have observed other investors acquiring legacy data centers that may no longer be suited for tomorrow’s computing needs or that may not have the power sources in place to support costumer growth plans. It is important for data center players to be able to call on experts in areas such as real estate, energy, technology, policy, and climate issues to help identify and appropriately underwrite digital infrastructure investments.

3. Finally, we value downside protection, even in a market that looks so attractive today. Our risk-based approach to infrastructure dictates that we look for exposure to assets with contracted revenue profiles, tangible value, or other protective features, as well as making sure that our long-term investments are aligned with customers and their roadmaps for growth.