Hyperscale Data Centers: How They’re Impacting the Data Center World - Data Center Fundamentals

[00:00:00] Speaker 1: Today we're continuing our series on the hyperscale sector of the data center industry. In today's discussion we're talking about the massive impact the hyperscale user has caused over recent years. Stick around, we'll unpack the details next. There's a lot of money in the [00:00:11] David: data center industry right now which is exciting but I think that's why it highlights the importance of the operational excellence that you just mentioned. You're listening to the Data Center [00:00:23] Speaker 3: Hawk podcast where we demystify the data center market. Data Center Hawk is your online platform for data and commentary on the data center market. Stay tuned and be sure to join the thousands of others who rely on Data Center Hawk to make decisions in the data center space. [00:00:40] Speaker 1: Okay so in the first couple episodes of this series today we talked about kind of who these hyperscale users are, where they are, how they've grown over the years, what caused the the arisal of this specific group of users. So today we're talking about how they impact the industry and I think this is what I think about it. Like if you if you were in a lemonade stand right and you're like eight, ten years old, moderately successful right, you 20 bucks your money and put it. This is describing my childhood right now. Yeah yeah and you got people come by, buy some lemonade, buy some lemonade. And then one day some dude drives up and he goes, I'll have 10,000 cups of lemonade. That would radically change how you approach the lemonade sales. That's almost like what the hyperscale industry. Now maybe not to that same magnitude but have done to the industry. I think it'd be, you know you change your supply chain, you would change your marketing and sales, you would change your capital structure. I mean all those things would happen. I mean I know you were talking about capital structure at age nine, ten. Totally. I've seen your business. 100% of my vernacular then. You're pro forma of your lemonade stand. So let's talk a little bit about you know some of those ways that these large, large, extremely large buyers have impacted the industry. I'll just you know kick it to you say like you know you think like a couple top three ways that they've impacted the industry. What [00:01:53] David: could first comes to mind? Yeah I think one is this the size of these requirements and how serving those sized requirements is like you know massively changed everything. I actually went back through our numbers uh you know as we've tracked the market over the last you know six seven years the data center market growth and I think that's a really good illustration of how it's changed. So I was just going to give you the 2017. We that's not how we we basically are tracking the top 10 um primary markets. That's what we started with and then over time we've added to that. So I just looked at the top 10 over the last four or five years. And so 2017 um and this is the demand that took place it was 233 megawatts and I would even say like before this like 2013 14 15 16 those markets you know probably in like the 125 150 175. So 2017 233. 2018 402. 2019 also known as the digestion year 280. 2026 90. 2021 we're in the 2020 was 690 megawatts. 690 megawatts. So you know that's one of the it's just the scale of this has just impacted so and it's created so many opportunities for people in the market you know not just data center operators that are helping these companies grow but vendors that are in the space you know if you think about like cabling or you know electrical companies or companies that are serving the the critical systems that need maintenance on a 30-day 90-day you know yearly basis like all that stuff's created big opportunities so that's that's one way it's impacted the market and I think the other thing is just you know it would be the impact on capital and not just how much you need but how to deploy it and where to deploy it and that's what this you know use the term game it's not a game but it's really been this how do we take this money where do we put it where do we build it how do we invest it and how does that serve our business best and that's um that has been the story of our industry in the [00:04:02] Speaker 1: last five years all right so look to thinking about like the size component of these deals I mean you may have not put down like the specific deal size but even anecdotally over the last five years like how these deal sizes changed you know how has the length of the deal changed if at all and then the pricing etc like yeah how has that shifted in the last you know five to seven years just based on you [00:04:21] David: know around these you know kind of core users yes I will take you back Mike to 10 years ago uh you know and we were seeing story time that's right that's story time with David so we were seeing the the the bigger hyperscale companies traditionally like building owning and operating their data center facilities in rural markets across the U.S. and that's where their big demand would go it would go to places like Iowa Boardman Oregon um you know just areas where they could get tax incentives and there was infrastructure there a lot of power a lot of water etc that that changed significantly in the 2015 16 17 time period and those companies wanted to be closer to population centers um and their requirements got bigger so those that bigger demand that was out there um it changed and so they continued that but then they also added additional capacity in big markets so uh from a leasing size side side of things you know in the 2013 to 2017 time period like the large transaction sizes that that we were seeing were in like the 10 you know megawatt range and that was considered obviously a very big transaction you know now over time that has shifted to really serve the strategic needs of either the smaller hyperscale companies that do have like four to eight 12 megawatt requirements of growth or companies that have you know 36 megawatts of growth that they need to deploy and you know 18 megawatt phases or 72 megawatt requirements that companies are are bill or you know are leasing from other providers and so that's that's where we've seen the change happen and there's more companies that are doing that you know if you're listening to this and you don't know much about the space this isn't like the the market is not overwhelmed by these deals meaning you know there's not 20 72 megawatt requirements that are out there but um there are certainly companies that have bigger requirements today than they ever have before and they're looking to the data center operator to help them figure that [00:06:26] Speaker 1: out yeah i mean you talk about like on the capital side i mean these as we know we've talked about on this podcast a lot like there's a there's certainly an ideal that all operators would would strive for where probably something like they've got land yep that's prepped and you probably you know i think ideally before they even started construction they'd have some type of commitment uh in hand you know short of that how are companies you know trying to attain that ideal and when they can't what do you kind of the contingencies look like in order to make sure that they're available to serve these hyperscale [00:07:01] David: users yeah i mean i think the specifically related to like the capital side of things just having access to a lot of money because these deals are so big you know that's one of the ways that those companies have really positioned themselves to be able to serve those deals is that you've got to go out and get capital commitments before some of these bigger companies come to you and say hey we we need this in this market is this something that you can help us with um and i think those you know the hyperscale user the data center user has gotten a lot smarter and is a lot uh more savvy today than they were five or ten years ago so like you mentioned the the site or site acquisition like you know we have discovered that a lot of these companies won't even talk to the the data center operator if they don't have land already acquired because they don't want to waste the time or spend the time going down the road of can this site or provider fit our needs in this market when there might be site acquisition complications that could you know delay their timeline so i think that's that's part of it i mean and then as i just think of the like greater whole you know the the the capital conversation around you know design around supply chain speed to market scale all of those things doing what the the data center operator or industry is doing around that you know takes a lot of money and um and i think that's the way that i've really seen you know my experience um the market be impacted by these big big deals you mentioned the land acquisition piece [00:08:40] Speaker 1: and i think one of the things i've come to realize is that the immaturity of this industry is it makes it more exciting and what i mean is that you know we have companies are buying large amounts of land and in anticipation of you know hundreds of megawatts of demand and if you're listening to this podcast and it's now 2025 or 2026 you'll be able to see if this you know really impacted the industry or swung the industry either geographically or how the development takes place you know by then but that's why that's what i like because i think people still think they can like shake up the industry yeah you know with how they approach it specifically around these hyper school guys and so you know that i don't think that's the case in other industries yeah i think you're going to continue to see people look for ways to kind of let's shift the conversation but get more attention yeah and it speaks to the [00:09:32] David: the young nature of this market you know the this is not an industry that's been around the way it is today you know for 50 years i mean we i mean we're in such a young space that's changing so much so fast uh that and it's and it's a space that is like critical to our everyday life and i think with those things you know that's kind of stuff that makes it exciting you're still seeing like rapid innovation ideas um and that that could have a dramatic impact on how the market moves forward in the future [00:10:09] Speaker 1: yeah i think another way that manifests itself is like on the pricing side yep you know i think we work really hard to you know understand where those kind of pricing ranges are right and you know we've gotten feedback from a couple of folks who use that if you say like hey there's just nothing else out there yeah um and that's you know again once again speaks to the kind of the youngness of the industry but you know there's a lot of one called guesswork but you might you talk about it being a game and yeah in some of that you know i think part of that is because you can you can have a 50 megawatt need in the data center industry which is whatever that is 200 000 square feet right anyways the math may be great maybe 300 000 square feet uh office demand doesn't jump around like that right and so that thing that that makes it what you kind of alluded to about the gameness of it is the the the demand can happen very quickly yes that's probably what they're yeah i make my point eventually no i take the circuitous route sometimes but i'll get there the plane has been landed i think the [00:11:09] David: the the reality around pricing too is you really have to understand what the what's actually being priced and what i mean by that is that you know in our market we have seen a dramatic decrease in pricing across the board across continents i mean this is just an industry um it's across the whole industry so just and there's reasons why you know one is that there's more competitors in the space uh you know two is that it's a much more efficient product today than it was 10 years ago so you're you're actually providing less that's that's more efficient um and then three the margins have changed and the expectations have changed on the space because it's become much more competitive so um but yeah it's i mean we work hard on our pricing to make sure that we are putting out there numbers that help the industry to be as accurate as it as it can and also uh understanding what is actually being uh priced which is changing you know and it actually goes into like design changes and expectations of the user and how they look at what they want to buy uh and 10 years ago i think most data center operators out there say like this is just what we build you need to adapt to this it's a totally different message today now it is how do you build and how can we adapt to that and that's why you see those numbers that i mentioned before you know 402 megawatts of absorption 2018 2019 close to 300 20 26 90. that is why those numbers have done what they've done is because that [00:12:43] Speaker 1: attitude or that tone has changed yeah i think we one of the stats that jumped out at me i believe it was from a dcd corning presentation was like the hyper scale they look i think the top 20 and said like what's the percentage of build their own versus lease the number was like steadily the amount that they leased was steadily ticking up as a percentages overall growth you know from 16 to 20. and i think that's that's probably more of a function of high demand they just literally cannot build fast enough yeah and so these companies again the multi-tenant guys that we're you know tracking as well need to to be able to pick up some of that demand and like you said it's it's powered shell it's turnkey it's what have you so you talk a little bit about that like the the dynamics of like a power shell versus turnkey and why would companies go one way or the other yeah and uh you know a lot has to do with [00:13:32] David: i mean certainly has to do with capital has to do with control um has to do with operating expenses these are you know traditional real estate topics that you know how efficiently you run a building and and if a company is a single tenant occupier of a building let alone a data center facility it's most likely that they're going to want to have an operational team that runs it themselves there might be scenarios where they prefer otherwise but um so when you think about a turnkey data center or a you know fully built out data center you know that that has a pricing structure that is paying for the basically the reservation of the equipment of all the ups and generators and raise floor and all that stuff and so that's how that leasing structure is put together there are some out there some big data center users that actually prefer a different leasing structure they prefer to lease the actual like building but then they they take their capital and they go out and they bring the ups and the generators and the race and all that stuff into the space and they pay for that and so uh like i said that's the advantage to them is that there's a control um advantage there is an operating advantage probably from probably from their perspective uh and i think there is potentially like a security advantage you know like their design is not necessarily shared with others and um so and that's become more popular you know if you look in markets like you know northern virginia is where it's most popular there's been a couple of of users that have really taken that to the next level in that market but but it's also been uh designed and built in other markets and there's actually been data center operators that will go buy that because it's a timing issue right they go like hey we we need to be in this market we're not there yet um if we buy this building or lease this infrastructure we are or lease this building then we can actually get to the market faster and so they buy it from a timing aspect so there's a number of like there's there's a number of advantages around the the powered shell concept you know i would have told you five ten years ago it was going away so the market was not building that and now it's kind of coming back a lot of that too is coming back because those bigger users that is an option that they want to see probably on the table when they're looking where they want to grow and so the data center operator community has had to had to really figure that out and go hey do we want to provide this type of structure to the market there are some that don't and they won't because of financial reasons and there's some that do and so that's just a that's where we are today and you know [00:16:11] Speaker 1: 2021 you brought up yeah like the some will someone that i think that underscores one of the other impacts is just how these companies organize themselves you know most of these most of the large you know co-location providers have entire teams dedicated to solving all those things you just described how to deploy the capital where to deploy how quickly when you know who can we pursue as a potential customer for this space uh is there a can is there a scenario under which where you know they would say okay we've got you know option to build a building here there elsewhere where they would almost prefer to have um you know five tenants versus one and given in a given space and why would they make [00:16:52] David: that decision yeah it could be the um you know you you might do that just given like if there's challenges with scale or something like that you might say hey this is going to be a smaller campus for us or building for us um you know there are certain markets that it's hard there are certain geographic markets that it's harder to actually deliver capacity to because of regulatory issues or design challenges like those type of things so there are some areas where you're you might be limited from that perspective but if you have like a big um if you know most data center operators today or data center developments are done with a campus mentality so you do have the ability to deliver different buildings or or like build to suit um options in on certain like parcels of land within a campus that's a way to approach it so i think it's important for a data center operator today to have multiple products that they offer to the market you know even if you are chasing the hyperscale companies it is still important to be able to have products that you know attract more wholesale typical customers you know 500 kw 4 megawatt type range you know i think [00:18:06] Speaker 1: you know given all those kind of facets of that of the the pursuit of these hyperscope buyers you know one one thing that i think is maybe overlooked by some is that you you still have to have a demonstrated track record of execution yes you know so it's a great point space and a building you know is those are some of the required elements there's certainly required elements table stakes can i use that term is that too businessy but but you know we see like you know some of these newer entrants into the market maybe taking a little bit of time to spin up or or kind of execute on some smaller deals before they're getting looks from those hyperscale buyers so i think that's some it's just important to note that that's a real factor in some of the decision making that's going on yeah and probably never more [00:18:50] David: important than it is today you know as it relates to the operational uh execution yeah well just companies being able to actually to your point deliver what they say they're going to do and there's a lot of money in the data center industry right now and i think that is exciting but it also maybe highlights how important that is well david it's clear that these [00:19:16] Speaker 1: companies are really driving change in the industry of both you know the things that they're demanding explicitly and in the ways that the operators are trying to meet their needs so you know i think it's again we spoke about earlier this the there's still a lot of change very dynamic i know that's an overused term but the way that the companies are delivering product and pursuing these customers the way they're needing product is again it's evolving over time so i think it's real exciting to watch you know going forward the next three to five years what are the next kind of changes are in the industry specifically around these are not going anywhere yep you know they're going to continue to have growth and and and needs kind of probably expanding out from another virginia around the country as it already has and maybe even into smaller markets yeah you highlight like the evolution of [00:20:00] David: this and it's hard to see a stopping point you know it's hard to see a pullback in demand especially from some of these bigger companies so i think from our standpoint we're we're we love being in it and being able to help provide clarity uh to uh what we think is a really important market [00:20:19] Speaker 1: today agreed all right dave well great thoughts on how these large hyper scale users are impacting the industry again some we'll continue to keep a close eye on uh stay tuned for 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