Clifford Chance

The digital infrastructure will continue to grow and change rapidly over the next decade. What does 2021 have in store for the data centre industry? The coronavirus (COVID-19) pandemic obviously has had a major impact on the market and strengthened the importance of data centres with a massive shift to online services on a global scale. Many companies and organisations that had long-term digital transformation plans in place now needed to progress these plans in a matter of days or weeks. Industries have been reset and the digital infrastructure is in the middle of that transition

So, what is next? Given the current developments, it is interesting to see where this takes the data centre industry. Based on our bird's-eye view of the data centre market, we have identified the following trends and developments for the data centre sector in 2021.

One: Big growth forecast for data centre construction

Although the data centre industry has certainly benefited from the coronavirus pandemic, and experienced a rapid increase in demand for data and online services, the pandemic has also had negative developments. End-user spending on global data centre infrastructure has declined by more than 10% in 2020, as pandemic-induced lockdowns have prevented around 60% of new facility constructions. Although new data centre building has somewhat halted due to the pandemic, the expectation is that it will likely bounce back with huge growth in 2021 if building can properly resume and staff can be physically onsite.

"An unprecedented tsunami of supply with 400MW of new data centre space is expected to be supplied in 2021, and the same again in 2022", according to Penny Madsen, research director for data centres at CBRE. The European market will surge to around 20% growth in 2021, as the building of some 128MW of deferred projects will be resumed. 

All of Europe's data centre markets are growing, but -, according to a report produced by DC Byte- ,there has been a change in the top-four European "gigawatt markets" for data centres, with Dublin currently growing faster than Paris. Dublin has joined the cities of Frankfurt, London and Amsterdam, all of which are expected to exceed 1,000MW (1GW) of data centre capacity before 2023 (so FLAP could become FLAD or FLAPD). Other fast-growing European markets include Madrid, Copenhagen and Warsaw, with over 700MW of enterprise hyperscale and build-to-suit developments between them in planning or active development.

Data centre investment in Europe continues to accelerate at unprecedented levels. Given the increase in remote working along with the emergence of the Internet of Things and 5G, the growing popularity of electric and autonomous vehicles, blockchain technology gaining traction and the fast digitalisation of society (which skyrocketed as a result of the coronavirus pandemic), we predict the data centre sector will continue to grow in importance and the demand for data centre construction will increase substantially.

Two: Focus on Climate Change 

The world's data centres consume around 200 terawatt hours of energy annually, which accounts for about 1% of the world's electricity consumption. In this process data centres create a significant carbon footprint, because they commonly rely on the world's current power generation mix, which is still heavily fossil fuel based. Many industries, including the data centre industry, are now becoming increasingly environmentally conscious which clarifies the focus on lowering carbon emissions becoming more important. Reliance on data centres accelerates with increased scrutiny regarding energy usage. Therefore, making data centres as environmentally friendly and energy efficient as possible will be a major focus of the industry globally.

Climate change will play an important role in strategic decision-making and puts the industry in a position to make a move towards sustainable business operations. Customers are putting climate accountability at the top of their agenda when selecting sites and providers. Data centre sustainability is becoming an important parameter in a climate-resilient economy and creates the need for data centres to actively improve energy efficiency and to be transparent about their sustainability objectives. It will also create new challenges for the cost and availability of power and will shape data centre legislation and technology.

Sustainability will therefore, undoubtedly, be a key narrative for the data centre market in 2021. There will be growing innovation around on-site renewable energy generation in the coming year, which is supported by government incentives such as those in the EU surrounding the use of renewably sourced power. Expect to see an increasing combination of data centre sites with alternative and greener sources of power available, such as solar and wind power, wave power, and carbon capture. And also expect to see more innovations in energy-efficiency on cooling systems and other energy-efficient designs.

Three: ESG-linked lending will boost green data centres

Obviously, data centre customers are not the only stakeholders that are focused on climate change and sustainability. Investors and financial institutions are also being held accountable by their own stakeholders for their sustainability goals and investments. Investors that seek to build greener portfolios are increasingly keen to attach a value to decarbonisation credentials when considering investment opportunities.

As the data centre industry looks at new ways to add (and finance) renewable energy, this will create new opportunities in attracting sustainable financiers that prioritise environment, social and corporate governance (ESG) criteria in selecting targets for lending and funding. This will, along with a growing mandate for corporations to shift to a greener energy footprint, stimulate new approaches to the financing of data centres. ESG-linked lending products that support green initiatives include sustainable improvement loans where pricing is linked to a sustainability rating or green loans or bonds using a Green Financing Framework where the use of proceeds is linked specifically to sustainable projects. A data centre's overall ESG performance is ensured through sustainable performance targets that reduce its cost of borrowing.

For the coming year, we will see investor behaviour continue to reflect the net zero imperative. We may even see jurisdictions or markets that financiers are avoiding because of lower or no sustainability goals.

Four: Edge computing becomes top priority

Data growth in 2020 was already booming prior to the coronavirus pandemic, but after its outbreak, and with the majority of the world working from home, the growth of data has been explosive. More than 14 billion connected devices are currently in use and the number will reach 21 billion by 2025. Also with next-generation technologies, such as AI, 5G, smart cities and machine-to-machine, enormous volumes of data will be generated. As data gets heavier, it will become more expensive and difficult to transfer that data to a centralised location all the time. Datasets are going to get so large that they will need to be located as close as possible next to the end-user. This importance of proximity and the challenges in moving large datasets have strengthened the potential of edge computing.

Edge computing relies on processing data as close as possible to the place where it is created (the edge of the network), instead of on a central server, greatly increasing speed and reducing latency. Unlike the conventional approach where every bit of data is sent to a centralised cloud, the aim of edge computing is to manage data and resources as close as possible to the end-user. Edge computing reduces costs because less data is being moved.

Edge computing is not new, but with the world becoming increasingly digitalised at an extremely fast pace, edge computing will make its mark on the architecture of the data centre landscape even more. Customers are requiring faster connections and low latency, and these are easier to accomplish by building small local data centres in close proximity instead of big regional data centres further away from cities. In order to facilitate edge computing, we will therefore see an increasing number of small facilities spread all around the world. To be able to deploy new small data centres in edge areas as quickly as possible, data centre providers must adapt to this trend and scale their operations. Having a centralised platform that can manage hardware in thousands of locations is a big advantage in this scenario. And with big tech players like Amazon and Microsoft already building local data centres to support the shift to edge computing, we expect edge data centres to grow exponentially.

Five: Substantial data centre M&A activity 

The data centre M&A scene has been active, with most of the major recent deals focused on global players adding capacity in new markets. According to a research report released by the Synergy Research Group, the dollar value of data centre M&A deals that closed in 2020 realised almost US$31 billion, setting a new record. This is significantly up from 2019's US$15 billion. Despite the coronavirus pandemic delaying a number of deals and slowing down due diligence activities, the US$31 billion sum was realised through at least 113 acquisition deals.

The spike in demand for data centre capacity is fuelling the drive to find new sources of investment capital. Over the past few years global investment giants who may be seeking to gain scale have backed new data centre platforms. With large data centre owners requiring a global data centre footprint to remain competitive, acquisitions are the most efficient way of meeting that objective. In addition, almost US$7 billion worth of deals and IPOs originating from 2020 are at various stages of closing. 2021 could therefore be a big year for data centre mergers and acquisitions.

Painting a Picture of Data Centres

This short video from our Painting a Picture series focuses on the data centre market, and showcases the creative skills, using invisible ink and ultraviolet light, of London associate Sarah Kate Boyd, with voiceover from Amsterdam associate Lotte de Bruin.