News and Press

Fact vs. Fiction: Dispelling Data Center Myths

April 22, 2024

In the ever-changing technology landscape, data centers are vital for shaping our digital infrastructure. Despite their crucial role, they are often surrounded by misconceptions. We aim to separate fact from fiction and shed light on common myths about the data center industry. 

The National Data Center Fund (“NDCF”) by National Real Estate Advisors is a commingled, open-end investment fund tailored for institutional investors seeking to invest in data centers. Through NDCF’s majority ownership of Sabey Data Centers (“SDC”), a U.S. data center company, investors can access a portfolio of properties and potential developments. SDC, in an exclusive partnership with National, handles development and operation. 

 

Myth 1: Technological Obsolescence is a Major Concern 

Contrary to some people’s perceptions, we do not believe that data centers are in danger of technological obsolescence. The business of data center operators is really grounded in real estate. Computer (“server”) technology is the tenant’s responsibility, whereas the provision of space, power, and cooling is the responsibility of the data center operator. Operator-provided components, such as generators, have a functional life of 15 years or more, while servers have a functional life of roughly five years. And while server technology is evolving quickly, these improvements depend on the power and infrastructure data centers provide.

As important, amid increased power efficiency, demand for data storage and processing capabilities continues to grow exponentially. By some estimates, the amount of data created in 2025 may be 90x the data created in 2010 and grow at a year-over-year rate of 35%.(1)

Myth 2: Data Centers Can Be Successful Anywhere 

Reality: Electrons travel at the speed of light, making it possible to place data centers in many locations. Some tenants, such as high-frequency traders, place a high premium on speed, but other tenants storing data that may need to be infrequently accessed may not care about a few extra milliseconds of delays.  

That said, not all sites are created equal. A data center’s success relies on several strategic factors, such as reliable and cost-effective power, fiber connectivity, available land, free cooling days (i.e., days where the weather reduces the amount of cooling required), political stability, seismic stability, and weather patterns. Currently, power availability is the largest constraint to data center development, and that barrier continues to strengthen as many data center tenants increasingly prefer carbon-free power.  

We believe that a diverse portfolio managed by experienced operators is more likely to result in data centers being optimally located for efficiency and resilience while affording tenants the opportunity to expand their footprints alongside the operator. The importance of geographic location in data center investments is critical, but the definition of “critical” depends on the application the tenant is conducting in the data center.

Myth 3: Increased Cloud Adoption is a Threat to Physical Data Centers  

Reality: We see the relationship between data centers and the cloud as one of synergy, rather than competition. Data centers are primarily where the cloud data is stored. Data centers are pivotal in supporting cloud services by providing the physical infrastructure necessary for cloud data storage and processing. As the demand for cloud services continues to rise, data centers stand to benefit from increased utilization, presenting a unique investment opportunity for institutional investors seeking exposure to this interdependent ecosystem.

Additionally, cloud services and hyperscalers continue to exhibit strong demand for leasing and build-to-suit developments, as leasing space provides them with speed, flexibility, specialized expertise, and the ability to focus on their core competencies. We anticipate that the exponential growth in data creation will continue to encourage the largest cloud service providers to lease space from data center operators as these companies struggle to fulfill their demand through internal ownership, operation, and development of data centers.

Myth 4: Data Center Operators Are Competing with Enterprise Users 

Reality: Enterprises increasingly outsource their data center needs to specialized operators. While news of large tech firms developing their own data centers does garner headlines, our experience tells us that there is too much growth in demand for these companies to shift capital and human resources from their core business competencies to focus on the operational elements of maintaining a data center. In short, most data center users are not in the business of building and operating data centers and choose to outsource their data center needs to specialized operators to leverage operator expertise. Experienced developers are relied upon by these tenants to use their core competencies surrounding site selection, entitlement, design, construction, and operations to provide tenants with a viable product. We have found that this relationship enhances operational efficiency for both parties.

Myth 5: Data Centers Are Not Sustainable 

Reality: Contrary to the common belief that data centers are not sustainable, the industry is actively embracing environmentally conscious practices. Leading operators invest in energy- and water-efficient technologies and utilize carbon-free energy sources, thereby minimizing their environmental impact. Additionally, energy costs and efficiency are of peak concern for operators and tenants alike due to the pass-through nature of power costs in the lease. This dynamic supports efforts to innovate and address challenges, including adopting advanced cooling systems and location strategies that leverage carbon-free energy sources.  

Selected data center operators are also setting ambitious Net Zero goals. Sabey Data Centers, for example, has set a goal to achieve Net Zero by 2029 for Scope 1 and Scope 2 emissions. The Science Based Target initiative validated this goal and includes interim targets; starting in 2023, SDC will reduce Scope 2 emissions by 21% from a 2018 base year and continue reducing Scope 2 emissions by 4.2% each year thereafter until 2029 when SDC will reduce Scope 2 emissions by 100%.

Myth 6: Data Center Demand is Saturated with Limited Growth Potential 

Reality: We believe that the demand for digital services, driven by trends such as cloud computing, the Internet of Things, 5G, and artificial intelligence, ensures that data center demand remains robust. It seems clear that the need for secure and efficient data storage and processing solutions will only intensify as the global economy becomes increasingly digitized. With the proliferation of AI, the demand for data centers is set to surpass even previous projections.

In conclusion, when we closely examine common myths about data centers,  we believe they are revealed to be exactly that – myths. We are confident that data centers will continue to play a resilient role in our increasingly digitized global economy.

If you are interested in learning more, please contact us for information about our commingled, open-end real estate investment fund, National Data Center Fund (“NDCF”), which offers institutional investors concentrated exposure to data centers.

This is not an offering or the solicitation of an offer to purchase an interest in NDCF. Any such offer or solicitation will be made to qualified investors only by means of a final offering memorandum and only in those jurisdictions where permitted by law. 

The reader should not assume an investment in NDCF will be profitable. Past performance does not indicate, predict, or guarantee future results. All investments involve the risk of loss of invested capital. 

[1] Amount of Data Created Daily (2024) (explodingtopics.com)