Hyperscale Leasing is Booming. Can the Supply Chain Keep Pace?

Multi-tenant wholesale data center leasing doubled in 2018 compared to 2017, spurred by a proliferation of a huge hyperscale leases, according to a new research report from North American Data Centers.

There were 12 deals in 2018 in which tenants leased at least 10 megawatts of data center space, adding up to 232 megawatts of space, according to Jim Kerrigan of North American Data Centers. That’s more than double the total in 2017, when there were seven deals of 10+ megawatts, adding up to 103 megawatts (MWs).

That huge growth explains why hyperscale is such a hot topic. Demand from cloud computing platforms and and social networks has super-sized the form factor for wholesale data center space. Gone are the days when the standard wholesale lease featured a 1.2 megawatt data suite. In 2018 there were six deals in excess of 20 megawatts, including the largest deal of all time – Cloud HQ’s 72 MW lease in Ashburn with a mystery tenant, identified in the new report as Facebook.

The companies leasing the most capacity included Facebook (97 MWs in two deals), Microsoft (90 MWs in eight leases) and Salesforce (30 MWs in four deals), according to the report from North American Data Centers.

Delivery Timetables Test the Industry

Tenant demand for larger chunks of space has wrought major changes in data center construction, prompting wider adoption of lean construction and pre-fabricated components to accelerate delivery schedules.

But it has also tested the supply chain and labor pool, which presents challenges in 2019 as the industry seeks to meet the ambitious timetables and budgets for hyperscale customers.

“New projects by operators expected in several markets during 2019 will face challenges related to timing due to supply chain restraints,” the report noted.

“I’ve talked to several contractors who say their pricing is getting higher and they’re passing it on to customers,” Kerrigan said in an interview with Data Center Frontier. “They really think there could be supply shortages on certain equipment.”

Risk Management Strategies

As the data center industry has grown and matured, the process of building new facilities has become more industrialized. Developers are keenly focused on achieving the lowest costs to borrow and build, and how to move faster. Variability in pricing and speed-to-market are natural growing pains, and while they’re not a serious constraint on growth, they can factor into the industry’s competitive landscape.

Provisioning large equipment like diesel backup generators and UPS systems has always been a priority, with large providers leveraging their vendor relationships to place advance orders. But in the second half of 2018, a number of industry sources reported delays for some smaller components of power distribution systems. Kerrigan says the industry is also watching for any impact from tariffs on steel and aluminum, as well as electronic components from China.

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A heat exchanger and row of chillers in a QTS Data Centers facility in Ashburn, Virginia. (Photo; Rich Miller)

Data center developers use different strategies to mitigate supply chain risk. Some examples:

• At the start of each year, CyrusOne estimates how much capacity it expects to build, and works with vendors to purchase most of the required equipment up front. This includes diesel generators and other power and cooling equipment, which is held in inventory at regional warehouses to allow for quick deployment once a project kicks off.
• Digital Realty uses a VMI (vendor managed inventory) system that features three-year contracts with vendors for major equipment needs such as generators, UPS units and switchgear. The company says it had these in place prior to the Trump administration’s tariffs, so it doesn’t expect to see any impact from fluctuations in the spot price for steel.

Although the industry’s larger hyperscale developers have risk management programs, it remains to be seen how broadly these strategies will work across the industry. Larger projects could have an edge in staffing, particularly in markets where labor is constrained. North American Data Centers says labor shortages have become an issue in data center construction projects in Northern Virginia and Silicon Valley.

One option to maintain delivery schedules is to import construction workers from other geographic markets. This has been a common practice for data center clusters in remote areas like Quincy, Washington and Prineville, Oregon. This approach brings more workers on-site, but sometimes involves training and having local team members work closely with newcomers to help them understand local codes and best practices.

In Relationships, Size Matters

As with the supply chain, relationships matter, and the companies with the largest workloads will find it easier to get vendor attention.

“We’ve been building in larger chunks, and have been able to establish a longer-term relationship with a lot of the local construction teams, keeping them on jobs for a longer period of time,” said Chris Sharp, CTO of Digital Realty, in a recent earnings call. “The talent that is required to build out these facilities is becoming extremely scarce. And that’s why we continue to secure long-term contract with the appropriate people to do the very complex installs and builds.”

Although the construction labor challenges are felt most acutely in the largest data center hubs, hyperscale projects can also impact the labor pool in smaller markets. Facebook’s new campuses featuring at least five data center buildings, providing steady construction work for three to five years as the campus is completed. Smaller facility operators in some of these markets report that Facebook projects have maxed out the capacity of regional contractors, forcing local data centers to look out-of-town for help.

For deeper coverage of the data center supply chain, see our 2016 overview (“Cloud Builders: Data Center Supply Chain is Ripe for Disruption”) as well as our 2017 Executive Roundtable on the topic (As Cloud Growth Accelerates, Data Center Supply Chain Adjusts).