Data Center Market Insanity

A few weeks back, I had dinner with Jon Atkins from RBC Capital Markets and some other friends in San Francisco. At dinner, Jon gave me his January 2019 Equity Research, which is the best prospective I have seen to date. All indicators point in the direction of growth.

But is it sustainable?

Four years ago, the industry CAGR was 9%. Then it grew to CAGR 12%. Last year Q1 we were at a 19% CAGR, and this year it is projected to be at 24%. This level of growth within the data center construction industry creates several obstacles for both owners as well as for the construction industry. Projections continue to look towards 2022, with over 3GW currently under construction within the United States alone in 2019. At the projected CAGR, we are looking at approximately 5GW of construction per year (not including overseas).

But is it sustainable?

Another challenge is that hyperscalers are scooping up our consultants at an alarming rate. While engineering firms pay very well, the stock options offered by the hyperscalers cannot be touched by the average data center engineering firm. These offers are just too good to turn down.

Ten years ago, we designed a 4MW data center for Allstate. Our fees were $2M to design its data center. Today, we are designing 40MW data centers, and our fees are still $2M. Owners are expecting shorter schedules and cookie-cutter designs to reduce their dollars per MW. The problem is that data centers are complex, and a good design team needs seasoned veterans to guide its designs. Design flaws can, in many cases, create million dollar changeorders. There are not enough data center veterans in the industry to keep up with production — and more importantly, to reduce risks.

Even worse than the data center design industry is the construction industry. Construction companies are hiring Millennials at an alarming rate. Their challenge is a clash between generations. The construction industry is very old, and the processes required to build a data center are proven; shortcuts cannot be tolerated. Many Millennials are not culturally able to adapt to such an old process. In 2019, we hit a record high for RFI requests by Millennials that were unnecessary.

Additionally, the larger construction companies are not pursuing any projects that are less than $100M. This creates a great burden on the trades as well as the owners. Wholesale providers that need a single suite built out are finding it difficult to find qualified contractors because their project is less than $20M. Recently, ESD/DW Hammer developed a studio to support fast-track design/build projects for data center owners who have projects that are $20M and less.

While the data center design and construction industry is booming, there is a dire need for qualified data center operators. Every one of our hyperscale clients complain about the industry shortage. Recently, I met with Lee Kirby, founder of Salute Inc. Lee’s company trains veterans as specialists within data center operations. To date, Lee has supported over 1,200 veterans in that training. He created a unique niche with little competition. If you think about it, there aren’t really any colleges that offer a data center operations curriculum.

While the industry is at its highest level ever, 5G is right around the corner. We can’t yet even imagine the change in processing it’s going to create. 5G will be 1,000 times faster than our current bandwidth. This, combined by AI and blockchain technologies, will only further the boom by 2022 and beyond. The formula between new technology and its impact on our future CAGR gives us sustainability.

But is it sustainable?

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Data Center Market Insanity

But is it sustainable?

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Data Center Market Insanity

But is it sustainable?

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