What are the key factors affecting the global leased datacenter market?

Introduction

According to 451 Research data, global wholesale datacenter power capacity has grown at a CAGR of 19% from 2015-2022 and is expected to overtake retail datacenter power capacity by the end of 2022, totaling nearly 17 gigawatts and accounting for 52% of total leased datacenter power.

The growth of wholesale is mainly driven by cloud hyperscale demand. However, datacenter supply has encountered unprecedented challenges, especially in major markets where hyperscalers are clustered, in the wave of sustainability concern that saw governments stepping in to push the pause button on datacenter construction. Singapore, London, Dublin and Amsterdam all have a moratorium in place. China kicked off its Eastern Data, Western Computing national project aiming to establish a balance between insatiable demand and limited resources. While cloud players used to using Dublin and Singapore to serve Europe and the Association of Southeast Asian Nations/India, respectively, data sovereignty and data security laws and regulations have forced the cloud players to seek capacity in secondary markets.

Cloud providers typically look to diversify their sites within a region, choosing multiple locations and datacenter providers to house their infrastructure and sometimes opting for self-built facilities. The pandemic has prompted cloud players to seek housing for their infrastructure closer to end users, and thus they have started to move swiftly into regions where they were previously inactive. On top of this, the data sovereignty and data security laws and regulations have forced cloud providers to move to secondary markets that used to be served by primary markets such as Dublin, London and Singapore.

Cloud and IT providers are growing rapidly, but when the scale of their demand in these secondary markets is not as high as in primary markets, they tend to use leased datacenter capacity to enter new markets quickly or to grow in areas where it is difficult or time-consuming to build their own facilities. The high power consumption of datacenters has understandably caught the attention of governments. The top markets are seeing more pressure on electricity supply, power usage effectiveness requirements and renewable energy usage. Moratoriums in Dublin, Amsterdam and Singapore have put a hard stop to datacenter construction, forcing developers to move to suburban locations or secondary markets. Additionally, more customers are requesting environmental, social and governance dashboard reports from leased datacenter providers. Under the pressure of both government regulation and customer requirements, datacenter providers must respond to the challenge.

Europe

In Europe, cloud providers are the main drivers of demand, along with firms that want datacenter space close to cloud availability zones (including systems integrators, software-as-a-service companies, enterprises, managed services firms, etc.). London's top sub-market, Slough, is finding it increasingly difficult to receive net new power supply for datacenters. Dublin's energy company has set a moratorium on new datacenter builds. Amsterdam paused datacenter construction in 2020 and consequently restricted datacenter development to certain locations and in certain quantities in 2021 after the lift. Frankfurt has restricted power in certain locations, so datacenters there are moving out to suburbs. Paris has power restrictions in the north of the city, so datacenter providers are looking for locations to the south of the city, but there can be issues with residents there resisting datacenter development. These supply restrictions are less of an issue so far for the smaller markets, but we expect to see similar challenges in these markets as they grow.

The General Data Protection Regulation, or GDPR, which governs how personal data of individuals in the EU may be used and transferred, went into effect May 25, 2018. Most of the cloud players used to serve the European market from Dublin. Since then, cloud players started to seek datacenter capacity in secondary markets such as Zurich, Madrid, Milan, Warsaw and Marseille to ensure compliance with relevant regulations.

Asia-Pacific

Growing cloud consumption is fueling a datacenter boom in Asia-Pacific countries, especially India, Indonesia, the Philippines and, most recently, Vietnam. All of these markets share similar demographic profiles, with large, young populations. Notably, the datacenter moratorium in Singapore further accelerated plans by cloud players to deploy workloads locally in these emerging markets. The cloud players have so far been the most bullish on Indonesia as Amazon Web Services Inc., Google LLC, Alibaba Group Holding Ltd.'s Alibaba Cloud and Tencent Holdings Ltd.'s Tencent Cloud have launched cloud regions in the country, while Microsoft Corp. is in the middle of constructing its datacenters in Jakarta. Additionally, Meta Platforms Inc. and Google have announced their investment in a subsea cable that will connect Indonesia and the Philippines to North America, increasing the potential of these emerging markets across Southeast Asia.

Meanwhile, with the ASEAN countries enacting the Personal Data Protection Act, other emerging markets started to draw the attention of cloud providers and datacenter providers, such as Vietnam. Amazon.com Inc., which currently holds the largest market share in cloud, has expanded its cooperation with local datacenter providers, and others are expected to follow.

China

By Feb. 16, four departments — the National Development and Reform Commission, the Central Network Information Office, the Ministry of Industry and Information Technology and the National Energy Administration — jointly approved eight national hubs to start the construction of the national integrated computing power network. These national hubs are in Inner Mongolia, Guizhou, Gansu, Ningxia, Beijing-Tianjin-Hebei region, the Yangtze River Delta region, the Chengdu-Chongqing region and the Guangdong-Hong Kong-Macao Greater Bay Area. Further, 10 national datacenter clusters are planned within the eight hubs.

The hubs in Inner Mongolia, Guizhou, Gansu and Ningxia are positioned to undertake non-real-time computing requirements such as background processing, offline analysis and storage backup nationwide, leveraging their resource advantages. The four hubs in Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area and Chengdu-Chongqing are positioned to further coordinate the layout of datacenters within the city and surrounding areas for a sustainable balance between large-scale computing power deployment and resources — including land, energy, water, and electricity — and optimize the demand-supply structure of the datacenter capacity. Within the hubs and clusters, indicators of operational efficiency, such as power usage effectiveness, or PUE, (1.25 or lower for large and hyperscale datacenters), utilization rate (65% or higher), carbon emissions and renewable energy usage are strictly specified to ensure healthy and orderly development.

Latin-America

In pre-pandemic days, Latin America already presented itself as a favorable location for cloud infrastructure due to a handful of factors: the underserved status of the region, its large population — often concentrated in major metropolitan hubs — and receptiveness of both U.S. and Chinese providers alike.

However, heavy taxation in Brazil has pushed cloud services to become notoriously expensive. Chile was one of the Latin American markets with the earliest levels of cloud activity, thanks to the rich connectivity and business-friendly environment, even though it ranks only seventh in the region in terms of population. Mexico was mainly served by the U.S. despite its fairly large population of 130 million, the second largest in the region.

With the COVID-19 pandemic, as companies sought to have their infrastructure closer to end users, American and Chinese cloud providers increased their levels of investment in Latin America and announced new cloud regions for unserved markets. Previously seeing low levels of cloud activity, the region is now home to over a dozen cloud regions, with AWS, Alphabet Inc.'s Google, Huawei Technologies Co. Ltd., International Business Machines Corp., Microsoft Corp. (Azure), Oracle Corp. and Tencent building out 10 new regions since early 2020.

Brazil is one of many countries that has followed suit in updating data protection laws after the passing of the GDPR in Europe. Brazil's General Data Protection Law (Lei Geral de Proteção de Dados Pessoais, or LGPD), signed by former president Michel Temer in August 2018, came into effect in September 2020. Outside Brazil, only Panama and Barbados have similar data sovereignty and data security laws.

North America

Northern Virginia, the world's largest leased datacenter market, continues to see strong demand, especially for wholesale, from cloud players taking datacenter space in large chunks. While available land in Ashburn is becoming limited, pushing the demand into neighboring locations such as Sterling, Purcellville and Centreville, Dominion Energy, which supplies electricity in Virginia, North Carolina and South Carolina, says it may not be able to meet demands for power in the area, delaying building projects by years. Also affecting the market, as in other major North American datacenter destinations with strong demand, is the scarcity of highly skilled IT labor, as well as difficulties in sourcing infrastructure and other datacenter equipment and materials, which like Dominion's power supply issues, threaten to push out development timelines. Even markets such as Montreal, which for many years courted datacenter developers both directly and indirectly with the cheapest power available globally, are starting to show cracks in their growth rates as limits to power supply begin to materialize.