Logistics giants muscle in on data centres
“Logistics giants muscle in on data centres” was originally published in IPE Real Assets.
Demand for data centres is booming. Now the world’s biggest logistics players have ambitions on the sector.
The world needs more data centres. It is a simple truth not lost on institutional investors – the asset class is one of the most in demand from real estate and infrastructure fund managers alike.
Demand in the US alone – measured by power consumption to reflect the number of servers a data centre can house – is expected to reach 35GW by 2030, up from 17GW in 2022, according to McKinsey.
In the US, data centres can cost as much as US$2,400 per sqft to build compared with US$150 per sqft for a traditional warehouse. The rise of artificial intelligence (AI) has only accelerated the sector’s growth. Morgan Stanley Research currently expects new AI data centre requirements of around 24GW globally from 2024 to 2027. AI is anticipated to take up 75% of global availability, against 33% today.
Some of the companies best placed to take advantage of the boom are those that have grown very big in a markedly different real estate sector – logistics. The kind of footprint that data centres require is not dissimilar to large warehouses – both are large boxy, squat buildings. Providing the planning and power are in place, land for huge warehouses is interchangeable for data centres.
With a combined power bank of some 9GW, the world’s three largest logistics players have already made substantial inroads into the data centre market. Goodman Group has secured or is in the process of securing up to 4GW of power, Prologis has 3GW and GLP Capital Partners can speak of 2GW.
Data centres need well-located sites in proximity to large gateway cities, and such sites, whether for data centres or logistics, are running into moratoriums placed by local authorities in response to citizen concerns around the environmental impact of such facilities.
“With a combined power bank of some 9GW, the world’s three largest logistics players have already made substantial inroads into the data centre market.”
As the top three players have come to dominate the logistics/industrial market globally over decades, they have also amassed a large swathe of sites in prime locations in large metropolises in the US, Europe and Asia-Pacific. Prologis alone has more than 12,000 acres of land and a portfolio of 5,500 buildings, a ready resource for when it chooses to convert or develop data centres.
The cost of data centres varies from jurisdiction to jurisdiction, but it runs into many hundreds of millions of dollars to build one centre. The development cost is typically 10 times what it was a decade ago, partly because the centres themselves are much bigger and more sophisticated.
Industry experts say that in the US, for example, data centres can cost as much as US$2,400 per sqft to build compared with US$150 per sqft for a traditional warehouse. Others point out that some of the most complex data centres can cost up to US$3bn (€2.8bn) each to develop.
Collectively, the big three talk about an estimated investment of around US$60bn to bring their data plans to fruition.
The most ambitious data centre strategy belongs to Goodman Group, which expects to be managing a A$50bn (€30.4bn) portfolio of data centres before 2030. At the same time, GCP will be in the market raising capital for its dedicated data centre funds. The Singapore-based group estimates the development cost of its centres will run up to US$20bn just to fund its current pipeline.
Prologis, which plans to develop a further 20 data centres to add to its current repertoire of 28 over the next five to seven years, says this will entail an investment totalling US$7-8bn.
While they insist their focus remains firm on the main game of logistics, the big three have moved quickly in recent months to formalise their data-centre strategies. Each has created a new division with a dedicated executive to lead expansion in the sector.
As an example, in January, the Goodman Group set up a regional office in Singapore, led by Hugh Baggie, who was appointed managing director of data centres for Asia. Baggie is responsible for connecting customers and investors with Goodman’s data centre development and delivery capabilities across the region.
These logistics giants have come to where they are today propelled by the strong tailwinds of e-commerce, but while demand for warehouses continues to grow, it may have peaked. An indication is that the post-COVID rental growth spurt, driven by the near full capacity of warehouses, is softening, and there might not be a repeat scenario of what has been witnessed since the start of this decade.
Now, generative AI is opening another door, throwing up what Craig Duffy, global head of fund management at GLP Capital Partners, describes as a “generational” opportunity.
GLP prepares the ground for new funds
AUM: US$128bn | Earmarked for data centres: more than US$20bn over the next five years
GLP Capital Partners (GCP) is preparing to launch new funds in the coming months as it expands into data centres – which it sees as a natural extension of its goal of providing critical digital infrastructure for the new economy.
“Moving into data centres is a deliberate and planned strategic expansion, a natural extension of our business,” said Craig Duffy, Global Head of Fund Management at GCP.
GCP estimates that it will invest more than US$20bn (€18.5bn) to develop its target of data centres capable of delivering up to 2GW of power over the next four to five years. GCP is focused initially on three to four markets: China, Japan, Europe and, potentially, Brazil.
Craig Duffy, GCP global head of funds management, says: “We are actively developing our capital strategy in key markets where we will be launching dedicated data centre vehicles soon. Over the next five years, we plan to continue to invest strategically, and expect data centres to become a significant contributor to our future growth.”
Through its in-house, fully integrated data centre operating platforms, GCP currently operates 12 projects in China with 320MW of in-service capacity and a further eight projects under development that will increase total IT capacity to 1.4GW upon completion. Its powered land bank also includes prime sites in Greater Tokyo, Greater Osaka and London’s Docklands.
The first of three buildings on a 31MW data campus in Japan, known as Tokyo West 1, broke ground in the third quarter of last year and is expected to be ready for service in early 2025.
Specifically in Japan, Duffy adds, power supply is a tremendous constraint – both the availability of sufficient power and the lead time to secure that power. With the 600MW of secured IT capacity that GCP controls in Japan, CGP is expected to cover roughly 20% of that market once fully delivered.
Duffy says: “We are in advanced planning stages for our Docklands site in London, which will be one of the largest data centre campuses in the UK, delivering 210MW of capacity. Moving into data centres is a deliberate and planned strategic expansion, a natural extension of our business. We see a tremendous generational opportunity. We estimate that there will be close to US$1trn of capital expenditure over the next three years in the data centre sector globally.
“AI workload will necessitate significantly more computational power than non-AI applications, and that, in our mind, creates massive demand for data centres, particularly at the hyperscaler end of the industry, so we’ve been trying to capitalise on this in a number of ways.”
He adds: “The greatest opportunities lie with trusted data-centre operators that have land and secured power, as well as sustainable, future-ready designs that can accommodate the demands of the large hyperscalers’ cloud and new AI deployment requirements.”
Since 2018, the group has built specialised teams to undertake the development of data centres. Duffy says these are highly specialised assets that require specific expertise. “We have been building that core technical competence across the full stack, ranging through design, engineering, construction, security, sustainability and operations,” he says.
In 2022, GCP recruited Jennifer Weitzel, a former Microsoft executive, to head a new venture, Ada Infrastructure, the group’s global data centre platform, to undertake projects outside of China. Ada Infrastructure launched with 850MW of secured IT capacity across Japan, the UK and Brazil and nearly 1.5GW of total potential future capacity.
Tokyo West 1, the first of three buildings on a 31MW data campus in Japan, broke ground in the third quarter of last year and is expected to be ready for service in early 2025.
Duffy says GCP leverages the group’s core expertise in logistics, especially in land-sourcing and project development, when commissioning new projects. “We have acquired a land bank and have secured power supply for data centre developments across key markets where we are active.”
GCP’s data centres will be grounded in “sustainability, safety and security”, he says. To improve and secure access to clean energy for the group’s logistics and data centre platforms, GCP has been increasing onsite renewable-power generation capabilities and selectively expanding into utility-scale projects, with 900MW of installed capacity worldwide.
“We have a dedicated renewable-energy fund in China, which we set up last year. We invest heavily in energy transition and we also have a rooftop solar joint venture in China. The fund invests in rooftop solar, ground-mounted, and utilities-scale solar projects.
“It also focuses on wind energy, and we have the flexibility to invest in storage solutions and other related technologies. Our private-equity arm also makes investment in technologies related to our core sectors, including energy transition.”
Duffy foreshadows the launch of a new fund in Europe, targeted towards rooftop solar but it, too, will have the flexibility to invest in related technologies, including storage and battery solutions.
Duffy says: “GCP data centres will all be designed with future-ready features, with sustainability as a cornerstone. All our inflight projects will meet or exceed international green building specifications.
“Sustainability performance will be optimised through fully integrated building management systems and we plan to use energy-efficiency measures such as ‘cool roofs’, high-efficiency lighting and advanced liquid-cooling systems which optimise the balance between power and water consumption.”
Today, GCP has assets under management totalling US$128bn, but data centres will likely form an increasingly larger percentage. “We continue to like the fundamentals around logistics and we continue to invest heavily in logistics,” says Duffy. “But I do expect data centres will become a much larger piece of our business over the next five years.”