Data Centers: The new logistics 3.0
Data centers are natural expansion assets for logistics
The COVID-19 pandemic has strongly affected real estate investors’ views of the different types of real estate assets. The various restrictive measures taken by many governments over the past two years have disrupted our daily lives and have notably affected certain asset classes such as hotels and retail. While these properties were previously highly coveted by investors, these same investors are now more attracted to logistics centers or data centers that meet new needs.
Indeed, technologies such as the Internet of Things (IoT),1 5G, the Cloud, e-commerce and video-on-demand services, the use of which is constantly increasing, have led to an explosion in the amount of data that needs to be stored and which requires increasingly energy-intensive processing and storage infrastructures. This explains why the need for data centers has increased dramatically over the past 10 years and the number of data centers in the world has accordingly been multiplied by 16 over that time, going from 500,000 in 2012 to 8 million in 2021.2
At the same time, while logistics assets have become very diverse and granular in their profile and locations, they did hit the city centers or close outskirts in particular to service the last mile delivery of e-commerce. In these central areas of large cities, the local planning rules often provide redevelopment opportunities for the building into other types of uses (activities, retail, hotels, offices, etc). In these circumstances, data centers can become the natural extension of logistics in the e-commerce expansion. Furthermore, besides the construction principles, which are similar, data centers can only be located in planning zones exempt from natural risks (flooding in particular) and connected to a high-speed fiber network, which typically are urban zones. Despite the necessity to obtain an environmental license for a data center, the competition with logistics is increasingly in favor of the former for investors, who are trying to secure land and vacant commercial premises that can be redeveloped. Furthermore, we see institutional investors starting to be interested in this attractive real estate market in built-to-suit schemes with identified operators. The reduced timescale for construction (sometimes less than six months), boosts the trend, as well as the EBITDA on the market, which can often increase by up to 25 times. The European market in this field is growing at such a pace that its global turnover should reach EUR15 billion by the end of 2024. The top five main European markets, referred to as the FLAP + D (Frankfurt, London, Amsterdam, Paris + Dublin) account for 70% of the European market for data centers, ie over 2.5 million m2 of constructed surface area.3
The Ile de France region itself presents the 4th biggest European market after London, Amsterdam and Frankfort.
The French territory as a whole represents additional favorable factors such as dense electricity and fiber grid, regulated tariffs and with a smaller carbon footprint due to the nuclear power, the ability to use free cooling for the cooling of the installations and finally its central location for connection to North America, Africa and the Middle East with respect to sub-marine cables.
The rise of the labels
Fulfilling ESG objectives has become the overarching constraint of any real estate investment. Against this backdrop of a strong need for data centers, the positioning of SRI-labeled real estate investment funds (the Funds) in this asset class constitutes a crossroad.
Since October 23, 2020, real estate investment funds consisting of retail real estate funds4 (intended for individual investors) such as SCPIs5 and OPCIs,6 professional real estate funds called OPPCIs7 and other unlisted real estate funds have been eligible for the real estate SRI (Socially Responsible Investment) label (the Label)8.This Label enables individuals and companies wishing to invest in the abovementioned funds to easily identify responsible and sustainable funds that integrate ESG criteria9 into their investment and management processes. The Label requires each fund to publish eight indicators, of which: four are mandatory10 and four are left to the fund's choice covering pillars E, S and G.11 Many investment funds have chosen to add two environmental criteria selected from water management, waste management and biodiversity.
From an opportunity trend to a hard constraint
This craze for increasingly responsible investment is proving to be true. As of September 6, 2021, barely one year after the Label’s launch, 27 funds, representing EUR23 billion in capitalization, have already been labeled SRI by no less than 18 management companies.
Given the constraints of this new player and the specific characteristics of data centers, the question arises as to whether the latter constitute an asset class likely to be of interest to Funds for which environmental issues now play a major role in their investment strategy.
Indeed, the environmental cost of data centers is increasingly questioned. Data centers account for 2% of total worldwide greenhouse gas emissions and their carbon footprint is comparable to that of air transport. By 2040, data storage could account for 14% of greenhouse gas emissions. In addition to producing significant greenhouse gas emissions, data centers are energy intensive, consuming large amounts of water and electricity. To date, 1% of the world's electricity production is used by data centers and could reach 10% by 2030.
Given these figures, it seems unlikely, at first glance, that Funds would wish to invest in this asset class. However, under the impetus of the Paris Climate Agreement and the COP26 held in Glasgow in November 2021, it should be noted that the current trend is to make data centers greener. Data centers could then find their place in the Funds' investment strategies.
This trend is notably supported by the latest French legislative measures that now force owners to make their assets greener. Since 2019, many construction projects for buildings with more than 1,000 m² of floor space for commercial, industrial or craft use, warehouses or hangars closed to the public can only be authorized if they integrate either a renewable energy production process or a vegetation system based on a cultural method guaranteeing a high degree of thermal efficiency and insulation.12 The French Climate and Resilience Act of August 22, 202113 reinforced this obligation by also making it applicable from 2023 onwards, to assets with 500 m² or more of floor space.14 Data centers are classified as warehouses,15 so these obligations are applicable to them. The application of this measure to data centers will reduce their environmental impact since having a green space on the roof allows natural insulation of the building and the installation of solar panels allows the production of renewable energy required for the proper functioning of the data center.
A new generation: innovation and synergies
This new legislative arsenal is a first step towards making data centers greener but is nevertheless insufficient in the eyes of investors and users, who are also turning to technological solutions. Thus, for a few years we have been able to witness the birth of new generation data centers. For example, the data center of Saint Ouen L'Aumône in France saves 30% of energy compared to market standards by using motorized shutters as ventilation grids, which, combined with fans, allow air circulation instead of the refrigeration units needed for air conditioning.
In Grenoble, France, the Eolas "Green" data center uses renewable energies and underground water from the Drac River to cool its facilities. This data center wants to go even further in its approach and recycle the energy produced by its computer servers to heat a neighboring company by taking the example of the data center that currently heats the Butte aux Cailles swimming pool in Paris.
To save energy, some players have gone even further in the solutions they have implemented. Microsoft, for example, has launched the Natick project "20,000 petabytes under the sea" with the Naval Group company, by submerging 864 servers in a watertight container for two years.
These examples show a strong willingness on the part of investors and users to go beyond the obligations resulting from legislative measures by using innovative technologies designed to strengthen the green aspect of this new asset class. In addition, a large number of European data center players have decided to go even further in the "Green" direction by setting themselves the goal of making data centers "climate neutral" by 2030 and have formalized this commitment by signing the Climate Neutral Data Center Act.
These recent developments are a real benefit for the Funds, which will be able to invest in next generation data centers and which, thanks to their significant financial resources, could become major players in the field of data centers.
1 The name refers to a growing number of objects connected to the internet, thus allowing communication between so-called physical goods and their digital existences
2 Data center: the impact of infrastructure on the environment and possible solutions – March 18, 2021
3 According to DCP (datacentrepricing.com).
4 Collective savings and investment vehicles, not listed on the stock exchange, managed by portfolio management companies approved by the AMF whose gross outstanding at December 31, 2020 would be EUR250 billion (Source ASPIM, base AMF)
5 Société Civile de Placement Immobilier
6 Organismes de Placement Collectif Immobilier
7 Organismes Professionnels de Placement Collectif Immobilier
8 Obtaining the label requires for the fund to have an audit carried out by an accredited organization which instructs, on the basis of the label's criteria, the application file for the label and awards, or not, the Label, in complete independence.
9 ESG criteria: environmental, social and governance criteria (energy, carbon, waste, biodiversity, mobility, safety, health, ethics...).
10 The four indicators imposed are energy performance, greenhouse gas emissions, mobility or occupant health and comfort, and supply chain management.
11 Minimum 1 per pillar E, S or G.
12 Article L111-18-1 Urban Planning Code.
13 Law No. 2021-1104 of August 22, 2021.
14 This obligation will come into force on July 1, 2023. Article L.111-18-1 of the Urban Planning Code will be repealed and replaced by Article L171-4 of the Construction and Housing Code.
15 Ministry of Housing and Sustainable Habitat – Fact sheet 6: Reform of construction destinations.