The multi-billion dollar industry that is relatively non-existent in Alberta...and shouldn’t be.
90% of all data was created in the last two years
Data is growing at an almost incomprehensible rate. There are 2.5 quintillion bytes of data created each day at our current pace, but with the growth of the Internet of Things (IoT), robotics, 5G and AI, that pace is accelerating. We are now at a point where over half of the world’s population uses the internet, corresponding to over 5 billion internet searches every day (Forbes). As the usage and demand for data grows through social media (Facebook, Instagram, Youtube, Twitter), email, bank transactions, driverless vehicles, and wearable devices, the infrastructure needed to support this curve is also exponentially growing. These impressive facilities (known as data centres) organize, transport, and store the data that we produce every day, through large, powerful stacks of servers. Data centres come in a variety of models and are a burgeoning commercial asset class that warrant a deeper look, particularly in a recessed province looking to diversify.
Types of Data Centres
There are various types of data centres, differentiated mainly by cost, control and scale. I’ve outlined four types below, although there is often hybrid models that overlap between these types to provide the optimal IT solutions for companies.
Enterprise data centers
These are built, owned, and operated by the companies that utilize them, and are most often housed on the company’s corporate campus, or perhaps in a single office within, depending on the size of the organization. This tends to be the most expensive vehicle for companies requiring an extensive data centre, but provides the greatest access and control. Hyperscale (enterprise) data centres are the largest in this type, usually containing a minimum of 5,000 servers linked with an ultra-high speed, high fiber count network and encompassing thousands of square feet of space. There are currently just north of 500 hyperscale data centres in the world, with the large majority being located in the United States. Specifically, most are centralized in Northern Virginia, where many of the original cables installed in the 1960’s and 70’s by DARPA, as a precursor to the internet, are located. Decades of investment in networks centered around the area, strategically just outside of the political epicentre of Washington, D.C., make this location one of the most important crossroads of the physical internet. According to Northern Virginia’s Loudoun Department of Economic Development, as much as 70% of all Internet traffic in the world is routed through the county on a daily basis.
Colocation data centers
When a company still requires some control of data, but can outsource less restrictive operations, they often do so by renting rack space for servers from a colocation data centre. The “colo” provides all the large infrastructure required (building, cooling, bandwidth, security, etc.) while the lessee provides and manages the components requiring more company control, including servers, storage, and firewalls. Colocation data centres provide interconnection between software, interconnection between platforms, and technical guidance to companies requiring assistance. Tenants utilize colocation centres for many reasons, such as added security, access to industry-leading coolers, or just to free up space. A company leases space on a per rack basis, and can rent as little as one rack (sometimes even 1/4 or 1/2 rack) up to 100 racks to house their servers. Thus, each colocation data center can house hundreds, if not thousands, of individual customers.
Wholesale Data Centres
Wholesale facilities fall under the umbrella of colocation facilities, but for much larger tenants, commonly being referred to Multi-Tenant Data Centres (MTDC). Companies such as Amazon or Facebook need extensive rack space, but may not have the time to construct a new enterprise facility, so will rent out (+/-)10,000 square foot hard-walled suites within a wholesale facility where they are charged by the amount of power allocated.
Cloud data centers
In this model, data and applications are hosted by a cloud services provider such as Amazon Web Services (AWS), Microsoft (Azure), or IBM Cloud. Businesses who utilize cloud data centres don’t have to maintain any of the physical infrastructure associated with computing, such as servers or fiber linkups. Additionally, there is huge flexibility to affordably grow storage requirements as the company grows - no need to buy additional servers and space, just buy more storage from the cloud provider.
Amazon Web Services (AWS) Data Centres - Ashburn, Northern Virginia
Key Features of Data Centres
Tech based real estate is becoming an asset class of its own, complete with unique requirements for its infrastructure. Data centres in particular are leased by rack or storage space, rather than square foot, but this is just the beginning of the features that set this infrastructure apart from other commercial asset classes, such as industrial, retail or office. Generally speaking, data centres require heavy power, heavy cooling, minimal parking, stringent security and unhampered access to fibre networks. On a broader scale, some of the most important features of a successful data centre include the following:
Availability Zone (Resiliency & Redundancy): Availability zones help cloud customers spread their regional operating risk by storing their data across separate buildings in case of a power outage at one.
Scalability and Flexibility: opportunity for tenant to scale up (or down) data storage permanently or seasonally. With enterprise and colocation, the company would need the ability to add/rent more rack space to modify server counts, while cloud data allows the user to simply purchase greater storage from the cloud facilities.
Density and Capacity Planning: the average density has historically been 5 kW a rack. This is now perceived to be increasing; 45% of companies said they expect average density of 11 kW per rack or higher over the next year (datacenterfrontier.com). Density matters - hyperscale facilities charge cheaper rates per kW/month, but racks are very dense (filled). Colocation facilities cost more (per kW/month), but are generally much less dense as different companies have different server counts within their racks.
Efficiency: much of the efficiency is related to the geographic power rates and terms
Cooling Infrastructure: data centres must have huge cooling capacities to ensure servers don’t overheat.
Diversity of Service Providers (Connectivity): A colocation facility will require connectivity to many networks so that tenants have diversity of providers.
Access and Control: depending on the type of data centre, different levels of access to the infrastructure (servers, software, data, etc.) are required. Enterprise data is managed by a company’s IT staff, while cloud data provides no access to the physical servers.
Latency: the time to get the information you want; the closer the users are to the data and networks, the better the latency.
Security and Reliability: the infrastructure must provide solutions to physical and online threats (firewalls, concrete walls, backup generators).
Interestingly, there is a rating system for data centres developed by The Uptime Institute that classifies them for proper design, build and operation, taking into account many of the above factors. Developers can have their facilities certified, similar to LEED, and organizations can then understand where different data centres stand compared to a global standard.
Facebook Data Centre - Dublin, Ireland
Data Centres in Alberta & Canada
Overall, Canada is relatively new to the data centre game, with the majority of current infrastructure being developed in the east. The networks are not as developed in Canada, nor as competitive, with fewer providers controlling the market. Furthermore, in many cities across the country, the cost of land, existing facilities and construction are elevated, which creates a hefty barrier to entry.
This is where Alberta has an advantage as our supply and demand curves are swapped, creating an excess of product which has pulled down the achievable sale and lease rates in the market. In the same manner that cannabis producers have been able to absorb vacant industrial space left behind by many energy-related companies, so too could data centres take advantage. Many of the facilities previously occupied by manufacturing and fabricating entities already have heavy power and HVAC systems integrated into the framework, allowing for the reuse of existing structures in this market. The non-residential tax rates in Alberta’s major cities are likely too high to attract the heavy investment required for data centres, but there are tax advantages in the periphery markets that could be enticing.
It’s no secret that a big challenge in Canada and Alberta are our power rates and limited providers. Counties that have had the best success in attracting this highly lucrative, clean and growing industry have created tax incentives, development initiatives and offered government support to streamline applications based on approved guidelines. Tech based real estate is quiet, new and most importantly, it pays the bills. By capitalizing on some of the positive features we possess, such as data sovereignty and the lack of equipment tax in some counties (no charge for computer equipment), as well as our desire to diversify, this could be a pivotal industry and asset class in the Alberta market.
Future Growth
To conclude this discussion, I merely want to point out the trends being displayed through the various commercial REIT markets. As of December 31, 2019, according to Nareit, just five Data Centre REITs valued at $89,501M, were nearly surpassing the total market cap of twenty Office REITs ($106,927M). Now juxtapose the market cap of these five Data Centre REITs which are worth more than half of thirty-eight Retail REITs ($171,404M), and I think you get my point. The growth of data centres has been unprecedented and I doubt it will be long before this becomes a viable, and lucrative asset class in Alberta.