Data center development pipelines and yields differ from the United States to Europe, which ultimately determines the quantum of new power capacity, in megawatts, that will be brought online in the coming years. Development capital expenditures from the publicly-traded data center REITs increased 10% year-over-year, from 2019 to 2020. Indeed, data center operators accelerated capital expenditures to fulfill record leasing demand of 680+ megawatts in the United States and 200+ megawatts in Europe.
Furthermore, development capital expenditures are expected to grow again in 2021, albeit more modestly. This is a result of data center operators completing pre-leased facility builds and funding speculative construction of additional power capacity.
Data Center Development Pipeline – United States
Overall, there are 375 megawatts, in aggregate, that are currently under construction in the seven United States Tier 1 data center markets. Specifically, significant new supply is under construction or planned for Northern Virginia (240 megawatts), Silicon Valley (25 megawatts), New York & New Jersey (20 megawatts), Chicago (15 megawatts), Dallas-Fort Worth (15 megawatts), Phoenix (30 megawatts), and Atlanta (30 megawatts). On average, this development pipeline represents 14% of existing data center supply (megawatts) in these markets.
Publicly-traded data center operators Equinix, Digital Realty, CyrusOne, CoreSite, QTS Realty Trust, and Switch contribute meaningfully to this development pipeline. However, equally important are large private data center operators. Specifically, these operators include CloudHQ, Compass Datacenters, EdgeCore, Sabey Data Centers, and STACK Infrastructure. Indeed, these operators also have extensive development pipelines, particularly in Northern Virginia.
Data Center Development Pipeline – Europe
Overall, there are 605 megawatts, in aggregate, that are currently under construction in the five Europe Tier 1 data center markets. Specifically, significant new supply is under construction or planned for Frankfurt (235 megawatts), London (170 megawatts), Amsterdam (70 megawatts), Paris (75 megawatts), and Dublin (55 megawatts). On average, this development pipeline represents 33% of existing data center supply (megawatts) in these markets.
Comparing the relative development pipeline as a percentage of existing supply in Europe, at 33%, to the United States, at 14%, it is evident that European data center markets are expanding at a significantly faster pace. Indeed, this point is exemplified by analyzing the revenue and development capital expenditures by region for key global data center providers. Specifically, below we highlight how Europe (or EMEA) comprises a much higher percentage of development capital expenditures, relative to in-place revenue, for each global data center region:
- Equinix: EMEA comprises 33% of revenue and 52% of development capital expenditures
- Digital Realty: EMEA comprises 28% of revenue and 43% of development capital expenditures
- CyrusOne: Europe comprises 11% of revenue and 80% of development capital expenditures
Clearly, the largest publicly-traded data center operators, including Equinix, Digital Realty, and CyrusOne, are prioritizing growth in Europe. Indeed, this prioritization for development in Europe is showcased by two recent investment partnerships.
Firstly, in October 2019, Equinix entered into a $1.0bn+ joint venture with GIC to develop and operate hyperscale data centers in Europe. Secondly, in May 2020, private equity firm KKR made a $1.0bn equity capital commitment to Global Technical Realty (GTR). Specifically, GTR is a build-to-suit (BTS) and acquisition data center platform in Europe.
Rationale for Increased Data Center Development in Europe
Rationale for the higher relative growth in capital expenditures in Europe is two-fold. Firstly, in Europe cloud adoption is less mature and cloud service providers are currently seeking to expand their footprints. Secondly, Europe data center builds offer superior development yields (shown below), as compared to the United States market.
Data Center Development Yields – Global Comparison
Data center development yield targets vary by location, type of data center build, and risk profile (e.g., pre-leasing). However, on average, data center development yields reside in the mid-to-high teens. For example, as part of Digital Realty’s 2021 outlook, the company forecasts spending $2.0bn to $2.3bn of development capital expenditures. Specifically, these capital expenditures have a target of 9.0% to 15.0% average stabilized yields. Indeed, this would position Digital Realty in the Core-Plus and Value-Add part of the risk-return spectrum for data center development.
Development Yields Case Study – Digital Realty
As of December 2020, Digital Realty’s data center development pipeline (excluding 17 powered shell investments) comprised $2.8bn, with 221 megawatts of power capacity under construction. Overall, these projects are 55% pre-leased and have a blended target development yield of 10.9%. However, decomposing Digital Realty’s development yield further by geography demonstrates a meaningful variance. Specifically, Digital Realty’s development yield details are as follows:
- North America: 8.5% development yield
- EMEA (primarily Europe): 12.5% development yield
- Asia Pacific: 10.5% development yield
Therefore, Digital Realty is an apt case study because it is allocating more of its development capital expenditures to Europe. While at the same time, the company is generating higher development yields from these European data center investments.
Management Commentary – Digital Realty
Digital Realty’s management team regularly highlights the development opportunity for the company in Europe. Specifically, Digital Realty’s Chief Financial Officer, Andy Power and SVP Global Finance, Bill Griffiths, have made note of the company’s increasing focus on Europe and rationale for this. Excerpts from their commentary over the past months includes:
“EMEA we kind of view as the largest growth market currently. The markets where we’re most concentrated there are Frankfurt, London, Amsterdam, Paris. We expect to see a good amount of demand there but also beyond those markets, into some of the smaller markets that we are expanding.”
Q4 2020 Earnings Call
“…you’re accurate in seeing this trend of a larger and larger share of our new capacity capital going outside the United States”
“As you leave North America and go to EMEA, I would say the competition is less, the barriers to entry are greater… Europe, but each one of these countries, cities, municipalities have unique nuances to navigate. And even for the hyperscalers, we’re able to generate premium returns to what we’re generating in North America”