What is a Hyperscale Data Center? - Data Center Fundamentals - Data Center Investing

[00:00:00] Speaker 1: Welcome to the Data Center Hawk podcast. Today we're talking about a concept that's revolutionizing the industry, the concept of hyperscale. If you're thinking about like, [00:00:07] Speaker 2: hey, should I invest time into this industry? Should I spend my, you know, I can do certain things and you might be coming from a technology perspective or whatever. I would just say, [00:00:16] Speaker 3: yes, is the answer. You're listening to the Data Center 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. All right, David. So today we're [00:00:37] Speaker 1: starting a series specifically focused on the concept of hyperscale. So I'm intentionally using that word, not in the way people typically use it in the industry, but I want you to talk about a little bit. What do people mean when they say hyperscale and why should we care? Yeah. A smaller [00:00:51] Speaker 2: set of large companies has created a new part, a new like sector of the data center industry that we refer to as hyperscale companies, hyperscale growth. And it really highlights how these companies have their, their infrastructure needs have blown up over the last, you know, several years. And so, you know, these are companies that traditionally really need to be able to scale their infrastructure at large scales very quickly. So we refer to them as hyperscale companies. And that is, you know, if I look back over the last 10 years, that's probably certainly one of the things that has impacted the data center industry the most. All right. So David, before we jump into the concept [00:01:40] Speaker 1: of hyperscale, I think it'd be helpful to set the table a little bit and just give kind of a 30 second primer on the data center industry as a whole. And then that'll help us help the listeners [00:01:49] Speaker 2: understand how hyperscale fits into that. Yes. Well, we are data center Hawk. So we track, you know, data center facilities. And we would define a data center as a physical facility that that houses digital infrastructure. So, you know, these are the servers that companies are using to power their websites, power all the applications that they use on a daily basis to run their business. And it's what our world uses every day to, to live. And so that's how the industry has grown over the last, you know, number of years has been these, these physical buildings. And when these hyperscale companies came along with the needs that they had, the current way of designing a data center, the current way of building and scaling infrastructure that the industry was used to did not meet those needs. So data center operators, these are some are publicly traded REITs, some are privately owned companies really had to go back to the drawing board and think through, hey, how can we and in their mindset, it all comes about how do we deploy capital wisely? So how can we build, shape, design something that will meet these companies needs today, but also allow them to scale up in the future. And that has been like a major change within the space. The other change I would say about these hyperscale companies, I'm sure we'll we might talk about this, I won't get too far into it. But traditionally, these companies would build in like, more remote markets, you know, areas that weren't like where you would see a lot of eyeballs, they weren't where like major population centers are. And they were doing that [00:03:31] Speaker 1: because what cheap land, cheap power, etc, etc. You got it. Exactly. I mean, it was Yeah, some of the concerns that are concerns today around latency just weren't as big a deal. Yeah. And so that has changed [00:03:42] Speaker 2: over time. And there was a major shift to those companies, which are still doing some of that that we just talked about, but they're also found the need to really be close to the users that are utilizing their service for a better experience. [00:03:56] Speaker 1: All right, so you touched on it a second ago, is it's really a small subset of companies within within the industry. So five to 20. That are really, they're making a huge capital spend on the build and the leasing side. So talk a little bit about, you know, what what types of categories those companies are in? Yeah, obviously mentioned a couple of them by name, and then how they've, you know, really grown over time. Yeah, what is interesting is everyone can every single person watching this podcast is impacted by this because you're probably watching this on YouTube or Apple podcast, that's right, which is, you know, going to at some point have a is a function of a data center. So and the growth of those two specific things, you know, YouTube, internet, podcasts, smartphones is all driving growth here. So talk a little bit about [00:04:39] Speaker 2: who those companies are. Yeah. So when you talk about hyperscale companies, there's really two categories. One would be large cloud service providers. I mean, you mentioned that we all use these on like a day to day basis. I'm gonna pause you right there. So define cloud service provider, a cloud service provider, you know, would really is a company that is providing cloud services to businesses or end users that, you know, help them either run their businesses or, you know, do things from a B to C, business to consumer perspective. And those and those cloud services have like massive needs, you know, and, and many of those companies were not did not exist 15 years ago, you know, 20 years ago. And that's, that's one of the really interesting things about our space that is unique is that it's such a young industry, but that so those cloud service providers are growing [00:05:30] Speaker 1: the the market. Certainly, we've actually done a pod on what is the cloud. So you can check that out we'll link it below. Yeah, I think I would picture them as like demand aggregators. Yeah, sure. You know, they take, you know, you have a platform for businesses to run their ID, their websites, etc. So they can all utilize, like almost like a shared resource pool. Yeah, sure. It's an oversimplification, but yeah, but that's a great watch the podcast. And you can understand why the [00:05:55] Speaker 2: growth has been Yeah, no, that's a great, you know, point is, I mean, that has changed the data center industry, you know, and the and cloud growth exists in physical data centers. So just, you know, wait, the cloud is not exactly what's the podcast. Yes. Okay, so then if I flip and say, hey, there's a second category, which would really be SaaS companies, social media companies that have hundreds of millions of users that have a lot of activity that are storing things that are doing things with videos, streaming pictures. And those needs can, you know, need to be or those infrastructure requirements scale up very quickly. And that's the challenge that these bigger companies have had the hybrid school companies have had is like, hey, how do we, you know, effectively serve our customers with where we are today, but then also be ready to take the next 50 to 100 million users. And, you know, that conceptually is like, you think might be an easy problem to solve. But when you think about you have to have the, the servers and the vision and the architecture, you know, on your application systems to handle that, it's, it's quite complicated. And so that and so you can bear you put those two, combine those two together with cloud service providers, and these SaaS companies, and you have 20 companies that, in my opinion, have really changed the trajectory of this industry, and will continue to, you know, for the next five years. [00:07:25] Speaker 1: Yeah, I think the term we've heard before is oligopsony. Oh, got to get it in there. I know. Spelling right here. This podcast is brought to you by the word oligopsony. And it's a small number of buyers. [00:07:38] Speaker 2: You have a, you have a following of people that listen to your word choice. The vocab following. Yeah. And I think that, I think that, I think that will, that will be exciting for them. [00:07:49] Speaker 1: Well, you know, you can't go back to the well too often, because I've used that word a lot on this podcast. So, but it is, it, we'll talk about this. There's a whole podcast in the future on how these companies have changed, how you're literally from site selection, to development, to leasing, to the infrastructure that's in the data center. All of these things are impacted by these 20 companies. Um, so hold on, can I just go back to the, I, I do want [00:08:15] Speaker 2: to say this for, if you're listening and you're trying to understand the data center space and data center industry, everybody comes at this from a different perspective. I came at it from commercial real estate. And so the data center industry was like an asset class for me, meaning like, Hey, there's the office asset class, the industrial asset class, the retail multifamily and data centers. And, and I would just tell you that the exciting thing about this space is it is so young, like, and the changes that we've seen are incredible from a growth standpoint, uh, and really don't have rivals as it relates to how we've seen some of these other commercial real estate industry classes grow. Um, and so if you're, if you're thinking about like, Hey, should I invest time into this industry? Should I spend my, you know, I can do certain things and you might be coming from a technology perspective or whatever. I would just say, yes, is the answer. I mean, I was lucky enough to get into this space and I am so thankful that I did because it has provided so many incredible opportunities. Um, and you know, it's not with companies, like I said, that have been here, been around for 50 or 60 years. I mean, the companies that are growing this space are ones that, you know, like 15 or 20 years old, some are four years old, which is mind boggling when you think about, but I think it just shows the excitement and the opportunities within this industry. So [00:09:38] Speaker 1: my PSA is over. Thank you. Yes. Okay. So lastly, for this intro podcast, you know, these companies, as you might imagine, with the amount of money they're spending have, you know, changed how the industry functions, you know, fundamentally. So talk a little bit about when, if people are listening to this, have an understanding of, of, of co-location and what it is. And again, we have a whole series on that data center fundamentals. We have done a lot, really done a lot. Um, you know, talk about how the concept of hyperscale, and I keep saying it like that, but we really want to talk about both the customers and the companies who are servicing them. So, so there are companies who would probably call themselves a hyperscale data center company. I don't know if they'd use that specific phrase, but they're certainly focused on those specific customer sets and, and building and designing data centers that meet those specific needs. Sure. So talk a little bit about how those, how those companies have really changed the industry, both from the real estate side, [00:10:28] Speaker 2: from the technology side, from the leasing side. Yeah. So I think if I just think about impacts on the space, you know, there are certainly data center operators that have chosen to fully focus on this segment of the market. And in order to do that, you need a lot of money, you need a lot of land, uh, and you need a lot of locations, you know, typically you need to be able to house these requirements in multiple markets. So because of that, uh, so that's one of the impacts is it's from a data center operator perspective, you know, they have, uh, gone out and raised more money. They've purchased more, you know, land, uh, in certain markets. Uh, they've changed their design to better accommodate, uh, these bigger requirements that take place because there is a key difference between an enterprise, you know, yesterday or this week we did a, uh, uh, a panel on with data center dynamics where we talked about the evolving enterprise user. And there's a very different requirement set for a bank that has, you know, one megawatt, uh, requirement versus, uh, uh, cloud service provider that has a 36 megawatt requirement, you know, and, and how you would go about, um, winning that customer, et cetera, from a provider perspective is just a different approach. You'd put that one megawatt deal in a different, uh, physical location than you might put a 36 megawatt deal, et cetera. So, um, so that's, that's the way it's changed impact the space on a provider perspective. I think on the, on the, the user side, you know, they have really leveraged their position to, um, achieve some really creative and incredible data center campuses in different markets. Um, and I think it's, it's spurred a lot of international growth. That's another way it's impacted the market. So we can hopefully talk about that when we do the full podcast, but certainly it's had an impact internationally. Um, and it's had an impact on pricing and returns and, you know, that as well. And, and so I think when you, when there are opportunities this big, a lot of people want to pay attention to them and have an opportunity to serve those requirements. And, uh, and so those, that, that changes the way people approach the market. So, you know, all those things are ways that the hyperscale, that hyperscale, hyperscale growth has impacted our industry. And I don't see that changing anytime soon. I mean, the, the impacts that will, you know, continue in these markets are, uh, the, the maturity that a market needs, geography needs to serve these markets. That, that is another thing that I'd say like in the future, just look for like, you, you have to have the power, the fiber, the water infrastructure to serve these requirements. Cause they're so large and that will push a lot of these cities that don't, uh, potentially to think of creative ways to get that infrastructure in place to, to serve those requirements. So that's, it's more of a list of things, but it's certainly had [00:13:40] Speaker 1: an impact on the space. Yeah. So clearly it's been, it's been, these guys are the, the kind of the elephant in the room or the whale at the poker table, if you were so that, that everybody's focused on [00:13:49] Speaker 2: that. Yes. Um, and not everybody's going to win. I mean, that's another thing that is a challenge in the space right now is you have a number of data center operators that are going after these requirements, but there's not, you know, let's be clear. I mean, there's not dozens of really large hyper-scale requirements that are, you know, just filling a list there, there, you know, smaller because a smaller number of them, because they are so large. Um, that being said, you know, don't, I think there's still a lot of growth in this sector, you know, and it's interesting how it's like playing out in the U S playing out in Europe, playing out in Asia. I mean, those are, those are interesting things to talk about, but I think that that's part of it is it's a very competitive market. And I would say this, the people that are leading the, you know, the data center operator community, I mean, very smart individuals that are, you know, uh, have gotten very thoughtful in how to put deals together that, that serve these companies. Well, 10 years ago, our industry didn't do that well. It was like, Hey, we're going to build this and you need to either take it or not. It's very different now. It's a very different approach, more collaborative. These are very smart customers, you know? And so when you show up with 150 million bucks, you know, you, you can kind of dictate your terms. Sure. You bet. So it's anyway, I think it's a, [00:15:10] Speaker 1: it's a fascinating part of the space. And you know what I keep coming back to over and over again, is an interview you did with tag Greeson, uh, from QTS a couple of years ago. He is the chief hyperscale officer. So going for QTS. Yes. For QTS. It was kind of underscores the fact of like, yes, companies are highly focused on this, this specific segment, but he said, you know, he really defined hyperscale as two things or three things. They want the ability to scale, like you mentioned, um, speed to market and then cost. Those are the three things that are going to drive them. And then he really said, there's two categories. There's companies that will lease 10, 20, 30, 40, up to maybe 75 megawatts at a time. Yep. Um, and just to put that number in context. So if you think about, you know, in the Northern Virginia market, you know, even just a couple of years ago was a right around a thousand or 1200 megawatts. So if you think about a 50 megawatt lease out of 1200, so that's, you know, three, four or 5% of the market in one transaction. So it's easy to see why these companies get so much attention when these transactions are so large. And then the other group was companies that are going to go one, two, three, four megawatts at a time. But over the period of several years, they'll become a 20, 30 megawatt customer. And so those, those are the two kind of types from a size standpoint of, of what he would still consider [00:16:23] Speaker 2: hyper-scale cause, uh, customers or companies. Yeah. And I, that's the area that's, I think, intriguing for me, it was intriguing for a lot of people that are in the space, but is when do those companies make the shift from going from the smaller, you know, requirements to somewhat of the bigger requirements? Cause that makes a major, uh, that has a major impact on the space. When you are bringing forth a facility to handle some of that demand, you know, one of the, one of the challenges is how do we forecast when one of these opportunities could take down our whole supply that we're bringing to the market? You know, and that, that's one of like a, it's a, it's a great problem. And it's an awful problem to have, you know, which is, Hey, we were building a pipeline to go into the, you know, with opportunities and one opportunity takes everything. And so all these other groups that we're working with, we can't help for a period of time. Um, and so that's the game that everybody's playing is, Hey, how do we manage our capital appropriately with the demand that we're seeing, um, and the supply that we're bringing online? [00:17:27] Speaker 1: All right, Dave. Well, thanks again for great thoughts on, you know, really hyperscale, a good primer for, you know, why this concept is so important. Yeah. Um, if y'all want more information, you can go check out datacenterhawk.com. We've got, um, I think blogs we've written over the years that are focused on different facets of the hyperscale industry. And obviously you can go [00:17:45] Speaker 2: search where those facilities are.