What's Driving Hyperscalers and Data Center Providers into Secondary Markets?

It would appear, at least on the surface, to be a genuine trend: Following up on the surge in investments in data center construction in smaller and emerging markets by hyperscale cloud platforms, wholesale data center builders and colocation providers are expanding into those same locales. They're still major population centers, and at least from the perspective of a travel agent, big cities. Now, as demand for data center services continues to increase during this seemingly never-ending pandemic, these locales are joining a broadening IT infrastructure and services industry, expanding markets throughout the world.

The reality is more nuanced, according to interviews with experts in the field, and a better description of the trend sounds more like this: Cities outside the traditional list of top data center markets are successfully incenting hyperscalers to build in their locales. In their favor, they're leveraging the fact that vital resources in those top markets – especially in Europe, and particularly Amsterdam – have become scarce or even unavailable.

"Interest in the FLAP-D markets [Frankfurt, London, Amsterdam, Paris, and Dublin] now competes with physical limitations," according to real estate advisory group Cushman & Wakefield's August report on European secondary markets. "Amsterdam has announced a temporary development moratorium on new builds, and land and power remain scarce across the slate."

Related:Investment Bankers Expect the Pandemic to Fuel a Long-Term Data Center Boom

The Inside Deals for the Outskirts

Back in June, Facebook announced its launch of a classic, H-shaped hyperscale facility project in Dekalb, Illinois, just outside of Chicago. And because hyperscale is a building pattern, two months later, Facebook announced another nearly identical project just outside of Nashville, Tennessee. There, as North American Data Centers managing principal Jim Kerrigan told Data Center Knowledge, the Gallatin Economic Development Agency had proposed legislation, which passed, specifically to attract a data center builder of Facebook's stature – not a multi-tenant provider, not a colo.

In early October, Microsoft announced the construction of two facilities in West Des Moines, Iowa. As the town's economic development director told a local business paper, those projects will give the town the influx of capital it needs to accelerate long-postponed physical infrastructure projects benefiting the entire region.

"I don't understand why Microsoft dominates Des Moines, Iowa," Kerrigan remarked. "I can imagine that there's relatively inexpensive land, if not free, [and] inexpensive power."

Related:US Data Center Operators Have Financing Advantages Over EU Counterparts

One possible demand that places like Dekalb and West Des Moines may not be able to fulfill for now, Kerrigan believes, is for low latency. The fiber connectivity and bandwidths available in larger markets may not show up here. That's a signal, he told DCK, that Microsoft isn't planning to utilize its Iowa sites for Xbox or real-time applications where low response times and high determination are critical factors.

On the other hand, if West Des Moines was informed ahead of time about the requirements of the specific Microsoft or Azure business unit that would consume these facilities' services, the municipality may have put together a deal to address them specifically and precisely. And that's the key here: Hyperscalers understand the profiles of their use cases beforehand and can communicate them in their bids and interactions with city officials.

It's applications that decide where, and how big, a major operator's data centers are built. Builders such as EdgeConneX – which facilitated Microsoft's 2016 deal with Dekalb – brought connectivity specifically for Outlook and Office 365 closer to their users, said Kerrigan. It just so happens that some of these edge locations are large metro areas, and some are even pre-existing hyperscale facilities. EdgeConneX came to prominence after facilitating Comcast's nationwide need for low-latency facilities to handle cable TV customers' DVR applications.

Yet there's less to differentiate a cloud operator deal from a colo deal than one might think. In April 2019, FedEx entered into a long-term agreement with Switch Data Centers for infrastructure. That led to the delivery giant becoming a principal tenant at Switch's 531-MW Las Vegas SuperNAP campus. But it also enabled FedEx to attain smaller, edge facilities for latency-sensitive operations. This, noted Kerrigan, was because of the deal-making power of cities and municipalities – this time, with Switch in place of one of the big cloud operators.

"The whole reason edge started taking off seven years ago," he told DCK, "was that it made less sense for everything to be in one location... You're saying, now the hyperscale guys are going to regional, huge data centers in tertiary areas? No, I don't think that's a new trend. Facebook's been doing this for years."

Build-to-Suit

Expansion into emerging markets was part of every data center provider's plan, explained Dave Fanning, Cushman & Wakefield's executive managing director for global occupier services, and co-author of the Europe report plus the firm's January 2020 Global Data Center Market Comparison. But everyone's plan was interrupted by the scarcity of physical infrastructure in major cities, particularly Europe's big four markets: Frankfurt, London, Amsterdam, and Paris.

"It's forced them to accelerate expansion into secondary markets," said Fanning, "to compensate for the delays, moratoriums, and lack of available land and infrastructure in the primary markets. We're seeing that start to evolve in APAC [Asia/Pacific] as well."

Last year, Amsterdam – the host of nearly one-third of Europe's facilities – had to call a halt to new projects for lack of available infrastructure support. There's not only a lack of power, but a lack of space. But Fanning is also seeing the earlier stages of this phenomenon popping up in Singapore and Hong Kong. "Primary markets, primarily internationally, are struggling to keep pace with demand," he told DCK.

Modern cloud infrastructure, explained Fanning, includes the notion of edge nodes – subordinate, usually remote, facilities that are interconnected with at least three of the cloud provider's major hyperscale locations. These nodes may include local availability zones. A growing number of enterprises are hosting their applications in these locations. But even then, they require IT assets and infrastructure that's outside the cloud but still fully orchestrated and monitored. Some of these are the edge nodes.

"We've seen a lot of these data center operators," said Fanning, "pivot towards the enterprise clients for what we would call 'build-to-suit' data center applications." These requirements are custom-made for hybridization, where utilized capacity is split between on-premises and on-cloud.

Wholesale providers certainly compete with one another for capacity in emerging global markets, Cushman & Wakefield's executive director told DCK, but the specifications they're building to are often provided by their most important clients: the hyperscalers themselves. And the hyperscalers are consumed with satisfying enterprise clients' need for edge nodes, either closer to their own customers, or to where their applications' data originates.

"If cloud providers are not able to self-perform their own development in the timeframe required, they may lean on data center operators," Fanning said, "who can provide availability on the site faster than they can do it themselves. You'll see a lot of companies that go out there and almost exclusively chase the hyperscalers for these wholesale developments."

An updated perspective on global data center building trends looks like this: Major metropolitan areas that aren't typically featured in the top data center markets list (e.g., Chicago; Columbus, Ohio; West Des Moines; Milan; Marseille; Reykjavik) are eager to enter a market that remains lucrative, even amid the pandemic. Hyperscalers, primarily the cloud providers, are the first to articulate their requirements. Those requirements are usually provided to them by their own customers. But wholesalers and colo providers, eager to sign on hyperscalers for their own deals, are willing to build-to-suit to meet those same requirements.

So wholesalers and colos are indeed following hyperscalers – just not the usual way.