In September 2024, Blackstone and the Canada Pension Plan announced a $16 billion deal to acquire Australian data centre operator AirTrunk, setting a new record for the sector. As data centres grow in importance, they have emerged as a compelling alternative asset class that benefits from non-cyclical growth. Blurring the boundary between real estate and infrastructure, the expansion of artificial intelligence (AI) has supercharged the sector.

The rise of hyperscale data centres

The proliferation of data centres has been fuelled by factors including digitalisation, the widespread adoption of cloud computing, the Internet of Things, and regulations mandating local data storage.

But the rise of generative AI has taken growth to a new level, leading to the creation of massive new facilities known as hyperscale data centres. Housing more than 5,000 servers and often spanning millions of square feet, these handle enormous workloads, from cloud computing to media streaming.

Global hyperscale data centre capacity will double in the next four years according to Synergy Research, with around 120 to 130 new facilities set to launch each year, adding to the approximately 1,000 already in operation.

AI market size forecasts

Source: Savills Research using using Statista

The energy conundrum

This expansion comes at a cost: data centres are notoriously energy hungry. According to the International Energy Agency, global data centre electricity consumption in 2022 was estimated to account for around 1% to 1.3% of global final electricity demand. In some countries, this figure is much higher; Ireland’s data centres consumed 18% of all the electricity generated by the country in 2022.

The rise of AI is only increasing demand for power. A single ChatGPT query consumes six to 10 times the power of a traditional Google search, for example. In the US, Goldman Sachs forecasts data centres will account for 8% of national power demand by 2030, up from about 3% today.

This has made access to power and limits on grid capacity the major constraint on new data centre development. According to Rick Drescher, Corporate Managing Director and Lead of Savills Critical Facilities in the US, “The rulebook of data centre site selection has been ripped up; it now all comes down to where sufficient power can be accessed. In the US, the biggest markets are Northern Virginia and Chicago and Dallas, but we’re now seeing significant growth in locations such as San Antonio-Austin, and that’s because power restrictions there are less of a factor.”

New opportunities

Power constraints are already limiting growth in major markets like London, Frankfurt, Amsterdam, Dublin, Northern Virginia, Seoul, Singapore, and Tokyo. These established data centre hubs are in highly populated areas and face significant competing demands on the grid. In response, restrictions or even moratoriums on new data centre development have come into force.

Consequently, investors are turning to markets with more accommodative conditions, particularly as cloud services have made the sector more location agnostic. Southeast Asia, particularly Malaysia, is one of the fastest-growing markets, boosted by demand from Singapore (neighbouring Johor Bahru has emerged as a major hub) as well as the rest of the region.

Indonesia has ambitious growth plans, supported by high internet penetration and government support for the sector. Vietnam’s data centre market is also growing, and to cement its position it recently allowed 100% foreign ownership of data centre schemes. India, too, offers significant potential thanks to a vast, digitally-connected population.

Jack Harkness, Director of Regional Industrial & Logistics Services at Savills Singapore, says: “There are many factors driving site selection, but growing constraints on power in mature markets mean new entrants are now considering sites in less saturated locations where there are fewer barriers to entry, in turn improving speed to market.

“We expect significant growth throughout Southeast Asia, especially in emerging areas outside the traditional hubs, where there are fewer challenges in acquiring large land parcels ideal for developing next-generation AI-ready facilities.”

Towards sustainable growth

When it comes to data centre sustainability, Europe is once again taking the lead. The EU Energy Efficiency Directive will require mandatory reporting of energy usage for data centres exceeding 500kW, and the EU is also laying the groundwork for a new data centre energy rating system.

Data centre operators are driving change, too. The participation of tech giants, with their own ESG criteria, is boosting sustainable energy capacity through power purchase agreements. Some have taken it further. Microsoft recently struck a deal to take all energy from one nuclear reactor on Three Mile Island in Pennsylvania for 20 years to power its data centre infrastructure in the region. Google is planning to commission new small nuclear reactors to support its own power needs.

Energy self-sufficiency, such as on-site renewable energy generation, is another growing trend, particularly in areas where green energy is scarce or the power grid is constrained. Some operators are considering constructing on-site renewable energy infrastructure, such as solar panel farms, though this tends to be feasible only for hyperscale data centres due to the levels of capital expenditure required.

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Source: Savills Research