What lies ahead for the data center industry in 2023? At Data Center Frontier our eyes are on the horizon, and we’re constantly tracking the trends that matter. Each year we identify eight themes that we believe will shape the data center business.
More than any year in recent memory, 2023 is likely to see dueling cross currents that could constrain or accelerate business activity in the sector. This sets the stage for pockets of vibrant activity in an industry grappling with higher costs, a slowing economy, and a challenging landscape for delivering new data center capacity.
We’ll be writing in more depth about many of these trends, but this list provides a high-level view of the topics that we believe will be most relevant in 2023.
1. Supply and Demand Meets Constraints and Delays
After several years of powerful growth, the digital infrastructure sector faces a challenging environment for building new data centers at Internet speed. As a result, data center space will be harder to find and could cost more, particularly in the second half of 2023.
On the supply side, key markets are facing power constraints, and new deployment timelines may be slowed by supply chain issues and community resistance. On the demand side, enterprise IT shops will likely face budget constraints, while the hyperscale sector must absorb the massive amount of capacity leased in 2022.
“We’re in a really unique time,” said David Liggett of datacenterHawk in a recent market overview. “Data center delivery has become increasingly difficult in recent years. This is due to a number of factors, including the need for larger amounts of power, competition from industrial developers, and an unreliable supply chain. This will lead to increased development timelines and likely higher lease rates, but also presents an opportunity for companies that can bring supply to the market quickly.”
The CEOs of the two largest data center providers acknowledge these challenges .
“We expect that the dislocation and volatility of capital markets, coupled with rising costs and the reduced availability of power in several markets, is constraining the ability to bring on new data center capacity despite the secular demand for data center infrastructure,” said Andrew Power, the CEO of Digital Realty, who said his company will “sharpen our lens and prioritize new investments to those that have the highest strategic merit.”
“We continue to closely monitor macro conditions and adapt our execution accordingly, but the fundamentals of our business remain exceptionally strong,” said Charles Meyers, the CEO of Equinix. “When I'm out and talking to customers and with sales teams, their number one concern is that we're going to run out of capacity we need. What I'm hearing is, ‘we need more capacity, we need to continue to invest in the business.’”
The data center sector is not immune to the business cycle, but is driven by broad shifts that support continued investment during economic dislocation, as seen in the explosive growth during the COVID-19 pandemic. As cloud services and AI continue to remake the business landscape, enterprise IT shops must confront the tension between budget constraints and the competitive risk of falling behind in an era of digital transformation. Recent headlines place this dilemma in sharp relief.
“Southwest’s epic meltdown over the Christmas weekend, which disrupted its operations for more than a week, appeared to be the result of years of deferred upgrades to homegrown software systems,” Tom Krazit noted at Mostly Cloudy. “It’s a wake-up call to any IT and finance departments returning from the holiday break knowing they’ve been putting off those updates.”
2. Generative AI Tools Emerge as Game Changers
There were spectacular advances in AI during 2022, especially for generative AI applications that captured the public imagination with their ability to create images, answer detailed questions, write essays on complex topics, and accelerate software programming.
We saw the emergence of stunning AI apps like ChatCPT, Dall-E, Lensa AI and GitHub Copilot that allow computers using machine learning algorithms to generate content, including text, images, audio, video, and code. The Nov. 30 launch of Open Ai's ChatGPT triggered excitement, gaining a million users in just 5 days.
"After decades of traveling along an exponential curve, AI has reached its own 'new world' moment," said Ashu Garg, general partner at Foundation Capital, who compares the impact of ChatGPT to the launch of the Netscape browser. "Sooner and more radically than we expect, AI will remake every major category of enterprise software."
As we've often noted, more enterprises are seeking to harness AI to make their devices and services smarter, and that process will likely be accelerated by the excitement around ChatGPT.
“The hype about generative AI becomes reality in 2023,” said Manuvir Das, Senior Vice President for Enterprise Computing at NVIDIA. “That’s because the foundations for true generative AI are finally in place, with software that can transform large language models and recommender systems into production applications that go beyond images to intelligently answer questions, create content and even spark discoveries. This new creative era will fuel massive advances in personalized customer service, drive new business models and pave the way for breakthroughs.”
Surging interest in generative AI will lead to fresh investment, even as users sort out the technology’s potential and problems.
“Public perception of next gen technologies matters a lot when justifying infrastructure investment,” said Rob Powell of Telecom Ramblings. “The fascination with ChatGPT will only grow and thus bring AI from a perceived future driver to a current one, even as the industry moves to put other forms of AI and ML to work in less high-profile ways.”
For the data center sector, this means more demand for specialized HPC platforms. The large cloud providers will be key players here, but forward-leaning enterprises may want to use these tools to unlock business value in proprietary datasets that may not be cloud candidates.
That creates opportunities for high-density colocation (such as Phoenix data center startup DCX, Colovore in Santa Clara and San Diego's ScaleMatrix), and offerings optimized around new processors (like CirraScale’s collaboration with Cerebras) and software frameworks (such as AnyScale) for generative AI. Larger colo and wholesale data center providers may accelerate plans to create high-density zones in their facility.
3. The Data Center Industry Confronts its PR Problems
There's a growing narrative that data centers are bad neighbors and devour vital community resources like water and electricity. As we predicted in last year's forecast, community resistance to data center development is a growing challenge in some of the most important data center markets. In Prince William County in Virginia, the approval of a huge data center development become the dominant political issue and prompted a 14-hour supervisors meeting to allow 300 residents to share comments.
As the negative headlines piled up, resistance to data centers expanded into growth markets with no history of previous data center development. In these cases, residents are seeking to reject new cloud infrastructure projects based on media reports about controversies in other regions.
This could become a significant business problem for data center builders as major markets face constraints on the availability of land and utility power.
An example: When Planning Officials in Warrenton, Virginia met in November to consider an application for an Amazon Web Services data center, 58 residents spoke against the project, with some waiting hours in the rain for their chance to be heard. A number of speakers cited concerns about noise, specifically mentioning media coverage of noisy data centers in Chandler, Arizona. The Commission voted to pause the application indefinitely to seek more information from AWS to address residents' concerns.
Warrenton, a town of about 10,000 in Fauquier County, is a potential expansion market for the massive data center cluster in Northern Virginia. These type of sites are likely to play an important role in the future of the data center market.
The data center industry has always preferred to focus on working behind the scenes to gain the backing of local officials, while keeping a low profile in any public controversies about their sites. It remains to be seen whether this is a tenable strategy going forward, as data center development becomes a political hot potato. Upcoming elections in Prince William County may indicate whether local politicians will pay a price for supporting data center development.
One thing is certain: the data center industry doesn't want the headlines and precedents from Prince William County to guide its future. Digital infrastructure has become essential to the global economy, and data centers can be powerful agents for positive change in the climate transition. But not if nobody wants them in their neighborhood.
4. Going Waterless, Everywhere You Can
One of the major tensions in data center development is the large amount of water used to cool some data centers. Extreme heat and drought are raising the bar for fast-growing cloud computing platforms and data center developers.
“In just a few years half of the world’s population is projected to live in water-stressed areas, so to ensure all people have access to water, we all need to innovate new ways to help conserve and reuse this precious resource," said Adam Selipsky, the CEO of Amazon Web Services.
In many regions, data centers are now using air-cooled chillers that recirculate water in a closed loop, drastically reducing their water use. But in other regions, they continue to rely on evaporative cooling systems that are highly efficient, but require lots of water.
Major cloud platforms are making pledges to be water positive, and are beginning to disclose more information about their water use. This is progress, but is also a response to public pressure and lawsuits seeking information about community water impact. After years of saying its water use in some markets was a trade secret, Google recently shared data on its water usage, revealing that its data center fleet uses 4.3 billion gallons of water in 2021, which works out to an average daily water footprint of 450,000 gallons per data center.
That's a huge number, and Google sought to place it in the context of the business activity created by its services, noting that it's equivalent to the water used for 29 golf courses (context: there are more than 11,000 golf courses in the United States).
The Google data also illustrated how water use varies widely based on regional climates and cooling designs. The Google cloud campus in Iowa used more than 1 billion gallons of water in 2021, while a smaller campus in Atlanta had a net impact of 13 million gallons.
"The best approach depends on local factors — there is no one-size-fits-all solution," said Urs Holzle, the Senior Vice President, Technical Infrastructure at Google, in a blog post. "In many places, water is the most efficient means of cooling. When used responsibly, water cooling can play an important role in reducing emissions and mitigating climate change. Water-cooled data centers use about 10% less energy and thus emit roughly 10% less carbon emissions than many air-cooled data centers. In 2021, water cooling helped us reduce the energy-related carbon footprint of our data center portfolio by roughly 300,000 tons of CO2."
Yes, water usage is complicated. But as more areas face drought and water scarcity (like the Colorado Basin), data centers will face growing pressure to reduce their water impact. The sector has a proven ability to conserve resources through innovation and operational discipline, as seen in its extraordinary success in energy efficiency, which yielded $60 billion in savings as the industry's electricity use rose just 4 percent between 2010 and 2020, a decade of exponential growth in computing power.
The energy efficiency revolution was a response to public pressure and fears of regulation. Expect to see a similar wave of innovation in addressing water conservation in coming years, starting in 2023.
5. For Hungry Hyperscalers, it's a Year to Digest
Anyone who has tracked data center activity over the past year shouldn't be surprised to learn that hyperscale operators may lease less space in 2023. These companies took down historic amounts of data center capacity in the first half of 2022, accelerating their infrastructure expansion amid concerns that the delivery of future capacity would be slowed by supply chain disruptions.
Many of these huge deals represented pre-leasing in which large customers procured entire buildings while they were still in the planning and construction phase. As the hyperscale companies battle to lock down the available inventory, they were clearly buying ahead. It was inevitable that at some point leasing would slow as these companies digest the capacity they've already provisioned.
The outlines of this can be seen in Meta's decision to pause construction on a number of its data center projects so it can "rescope" it's new facilities with a pending design change focused on AI. Google has also adjusted its expansion plans, reportedly abandoning a data center project in the Minneapolis market.
There are also changes afoot at Twitter, which was a large consumer of wholesale data center space as recently as 2021. New CEO Elon Musk is in cost cutting mode and reportedly has recently closed one of the company's data centers in the Sacramento market.
“We’re seeing a slight pull back from these largest users in the pace of their demand,” said Liggett. “This could result in some fluctuations within the market and could mean that significant growth numbers may not be seen for a few months. Given the significant demand we saw in 2022, though, we believe this slowdown will only be temporary.”
The hyperscale market previously went through a digestion cycle in 2019 after record leasing in 2018. But it was only a temporary pause as the industry was back to blockbuster leasing in 2020 and 2021.
6. Secondary Markets Continue to Boom, from Cloud to Edge
This year we are doubling down on our emphasis on data center growth in secondary markets, a trend that has gained momentum as power shortages have emerged in primary markets. This will include the emergence of more submarkets around existing data center corridors, as well as massive projects in new areas with enough power and land needed to support the new breed of MegaCampuses.
As usual, Northern Virginia provides the most obvious example of this trend. The towns of Gainesville and Catharpin in Prince William County are the focus for more than 20 million square feet of data center development by Compass Data Centers, QTS Data Centers, NTT Global Data Centers America, and Corscale Data Centers.
Across the Potomac, Aligned Data Centers plans to build at least 3.3 million square feet of data center space in Adamstown MD in Frederick County – and it’s just the first announced customer for the multitenant Quantum Loophole megacampus.
A similar trend is seen in Suburban Chicago, where large server farms are underway in DeKalb, Mount Prospect, Northlake and Itasca.
“Opportunities are plentiful but we’re seeing more growth now in tier two markets,” writes Ernest Popescu, Head of Global Site Selection, Iron Mountain Data Centers. "In the US, we’re seeing more data center development in cities like Denver, Pittsburgh, Detroit, Salt Lake City, and Tampa, which are all “football city” markets."
“The constraints in major regions will continue to drive demand in ‘second tier’ markets,” said Rhea Williams, principal site selector for Oracle Cloud, in a recent DCF Roundtable. “The higher utilization of personal and household devices pushing greater data consumption and creation will drive the need for more coverage from a latency standpoint. Whether you call it second tier or the edge, everything points to growth.”
7. More Data Centers Embrace On-Site Power Generation
Power is another area where we are seeing echoes of last year's forecast, where DCF predicted that data and energy would form forge deeper connections. That has certainly proven to be true, but in this year's forecast we will narrow our lens. In 2023 we will see more data center projects that include on-site energy generation to enable expansion in grid-constrained markets.
An early example of this trend is in Ireland, where Microsoft plans to build a massive 170-megawatt gas-fired power plant in addition to 21 smaller diesel generators. The decision comes after Irish grid operator EirGrid effectively capped power hookups for new data center construction in the Dublin market.
Similar strategies could emerge in Northern Virginia’s Loudoun County, where new power hookups from Dominion Energy will be severely limited until 2026 due to constraints in the local high-capacity power transmission network.
On a smaller scale, this year we will see the US market entry of Edge Centres, which specializes in off-grid edge data centers supported by solar power. The company has built a network of these facilities in Asia including sites in Australia Malaysia Vietnam Thailand Indonesia and the Philippines.
We're also likely to see more focus on the use of hydrogen fuel cells for both backup and primary power according to the experts at Vertiv.
“These fuel cells will function much like a generator at first, providing momentary load support, and eventually hold promise for sustained or even continuous operation,” Vertiv said in its projections for 2023.
Both Microsoft and Equinix have projects underway to test hydrogen generation In their power operations. We can expect to see an accelerated focus on this technology in 2023.
8. Rethinking Churn: A Problem Becomes an Opportunity
Data center providers have always seen churn as the enemy. But attitudes toward churn, in which tenants vacate data center space when their lease expires, have been evolving as the industry enters a period of capacity constraints.
When a customer departs, providers must fill the empty space, which doesn't generate revenue while it is vacant. In an environment where new capacity is scarce, existing space becomes more valuable.
“We're even seeing that people who were planning to churn are now unplanning it,” said Charles Meyers, the CEO of Equinix, in a recent earnings call. “Ensuring that they have capacity, and under existing terms or something that is close to those existing terms, is a strategic decision for them. We're continuing to see favorability in churn for those reasons.”
The shift in supply has altered a long running dynamic in data center pricing. “We are continuing to see improving pricing power across our platform,” said Digital Realty’s Power, who said enterprise colo rates are 10 to 15% higher and noted that providers with vacant space in Ashburn will be particularly well positioned.
“But between now and (2026), there’s going to be less supply in the biggest high-demand market,” he said. “What that means is that the pricing power pendulum is shifting back towards us.”
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