DATA CENTER: STATUS QUO AND PERSPECTIVES

What is a data center and what types of data centers are there?

A data center is a building where large amounts of digital data are stored, processed, and managed. The exact usage differs based on the different subclasses:

• Enterprise Data Center: Own, small data center, usually directly on the company’s campus, which exclusively supports its own IT operations.
• Colocation Data Center: Data center operated by a third-party provider that rents out space (whitespace). The IT hardware is brought in by the tenant.
• Hyperscaler/Cloud Data Center: Large data centers used by hyperscalers (AWS, Microsoft, Google, etc.) for cloud computing services. The aim is to achieve a particularly high degree of flexibility and scalability of the applications.
• Edge Data Center: Small data centers, also operated by third-party providers, which have a more regional approach and seek proximity to the end customer.
• AI data center: Data centers with a particularly high demand for data and computing resources for training AI models.

Data centers seem to be becoming one, if not the favorite asset class of many investors. Why is that?

On the one hand, the return and profitability of data centers is significantly higher than that of classic logistics properties. Due to the high demand, the operators can pay significantly higher prices for both land and properties. This is due to the fact that the demand in the data center market is very high. This is also the reason why many project developers and investors are flocking to this market.

How does the German data center market compare to other European countries?

Within Europe, the German market is the largest: the leader with its two locations in Frankfurt and Berlin, followed by the English market. Here, London has large capacities as a mega metropolis, but is behind Germany overall. Other important markets are Ireland and the Netherlands.

Frankfurt is the data center capital of Germany. Why is that? And which other locations play a role here?

Frankfurt is the absolute data center capital in Germany. This is mainly due to DE-CIX (Deutsche Commercial Internet Exchange), which runs through Hanauer Landstraße. DE-CIX is the largest Internet exchange point in the world with a data flow of around 17 terabytes per second. This Internet exchange ensures very low latency times for the operators of the data centers and the users. This is a very decisive factor that our customers look for. Berlin has established itself as a second hotspot. But to put that into perspective: In Frankfurt, we are currently talking about an approximate total capacity of just over one gigawatt of rented IT load, with a relatively large amount still in the pipeline. In Berlin, we are currently talking about 300 megawatts of IT load.

The reason why Germany plays such a central role in the data center market is due to the fact that it is located in Central Europe, that we have a very stable overall economic situation and also that the issue of data protection is a top priority for us.

Do countries in the North also play a role in the data center market?

There are one or two hyperscalers and also data center operators who choose a Scandinavian country. The background is quite simple: On the one hand, the cheaper availability of electricity, for example through nuclear power. On the other hand, the topic of cooling plays another important role. This means that the colder the outside temperature, the less power is needed for cooling, so the power can be used for the actual performance of the servers.

Where within a city, for example in Frankfurt, can a data center be built?

In principle, data centers can be built in commercial and industrial areas. In Frankfurt, we have a special case, as we have a data center master plan there that prescribes in which commercial and industrial areas the settlement of new, non-business-relevant data centers is still permitted at all. Otherwise, the most important criterion is the availability of electricity. This means that the proximity to high-voltage lines or substations is often a good indicator of functioning data center locations. Of course, there is also a critical plot size that is needed. Often, however, people tend to go the other way and look at the knock-out criteria where a data center cannot be located. Operators of a data center are very concerned about their security, or rather very concerned that there are no malfunctions in operation. Knock-out criteria for her could therefore be:

• Nearby establishments where explosions could occur
• Flight paths, for example from Frankfurt Airport
• The proximity to the Main when it comes to flooding

What other challenges do data center project developers face?

Here we have to distinguish whether we are talking about real estate project developers or whether we are talking about data center operators or developers. For real estate project developers, the topic of data centers is a new challenge. It is a new asset class that has little to do with classic real estate. The magic happens inside the data center. The property itself is only a shell, a protection against external influences. The main focus is therefore on the technology that is installed there.

This is also reflected economically in the costs. As a rule, the inner workings of these data centers significantly exceed the costs of the actual property. The servers quickly cost three to four times the building envelope.

Why are so many new project developers showing interest in this seemingly quite complex asset class right now?

The market for data centers is currently a fast-growing market. While in some cases a sideways or even downward movement is observed in other asset classes, the data center market is currently working very well. It is therefore no secret that you can earn money by successfully developing a data center or even just providing suitable land. In the end, these are simple macroeconomic drivers: There is huge demand, driven by digitization and AI, and at the same time a very limited supply. This is driving up prices.

The availability of space, especially here in Frankfurt, is a problem. Where can a data center be built at all? Conversion and conversion certainly play an important role here?

Absolute. When reusing a vacant logistics property or developing a new building, many developers nowadays check whether it is possible to use a data center. In general, the data center is highly attractive when the power supply is secured in the first place, as higher margins and profits can be achieved. This is exactly what makes it attractive to enter this market, even for classic project developers. Data center developers can also pay significantly higher land prices. These are almost always higher than those of the classic logistics hall, often three to four, if not sometimes even five times what a classic real estate developer can pay.

Do other asset classes also play a role? For example, will office properties also be converted into data centers?

There are certainly one or two office buildings that have been converted into a data center or are still being converted. However, the conversion is associated with relatively major challenges and conversion measures. For example, significantly higher soil load-bearing capacities are required. The ceilings must also be significantly higher. In addition, there is also the approval side, i.e. building law issues such as fire protection or compatibility with the environment. But there are examples that show that this can work, especially when talking about the subclasses of edge data centers or, in some cases, smaller colocation data centers.

What does the future of the data center market look like?

The data center asset class has its justification and is a separate asset class that must be considered separately. It will become more important, but will never reach the volumes that we have in the logistics real estate market or are familiar with from other asset classes. If you think about artificial intelligence applications, it will remain a growing market in terms of demand. However, especially due to the high degree of specialization, it will not become mainstream, as it is not so banal to develop a data center.

Data centers are part of the critical infrastructure for our country and the world. Accordingly, the asset class will become indispensable. The growth is enormous due to the drivers just mentioned. To give an example: If I enter the keyword “BNP Paribas Real Estate” into a search engine, it consumes a certain amount of bits and bytes. However, when I ask a question, that’s where an AI application starts. And this consumes ten times what a normal search query would cause. Of course, there are also opposing processes on the other hand: the servers are becoming more and more efficient. This means that more and more power can be mapped in a smaller space.

And perhaps as a final point, once again on the topics of real estate, capital markets and asset classes: What we have seen so far is that project developers and also private equity money are very intensively involved with the topic of data centers. What we haven’t seen so far, however, is that it will become a classic capital market product, as we know it from other asset classes. It is certainly an exciting question whether this will also become a common and tradable capital market product in the future or whether it will perhaps go more in the direction of an infrastructure product.

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