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Data centre cost index 2020

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COVID-19 accelerates global data centre competition and capacity challenges

While the pandemic has wreaked much disruption to international construction markets,

the data centre industry has largely bucked global trends during 2020 – accelerating with new-

found urgency through the COVID-19 crisis to meet the demand for capacity.

Worldwide lockdown measures sparked a surge in internet use and a significant increase in

businesses outsourcing services to the cloud, as employees shifted en masse towards remote

working. Already growing as a hot ticket investment, data centres have emerged as a key

priority market in the context of a global pandemic. 71 percent of our survey respondents now

consider it to be a recession proof industry – up from 50 percent last year.

This can be evidenced by the busy development market during 2020 – with substantial site

acquisition activity and a blitz of pre-development work undertaken. A lot of this investment has

been concentrated in the secondary European markets, where there lies significant untapped

potential.

Yet industry opinion is split 50:50 on whether data centre construction has managed to keep

pace with demand during 2020.

The data centre sector has been plagued by productivity setbacks as a result of COVID-19 and

the implementation of social distancing measures on sites, combined with a stretched

international construction supply chain that was already approaching breaking point prior to the

pandemic.

Our study finds that 79 percent believe COVID-19 has caused productivity losses and higher

operating costs on data centre construction sites.

The current crisis, and increasingly competitive nature of the market, has starkly exposed the

fragility of the global supply chain and its potential to curb future growth. Data centre providers

need to be alive to the very real risks of contractor insolvency and knock-on impacts to

projects.

In our survey, 55 percent of respondents believe there will be a rise in data centre

construction claims and litigation in 2021 linked to COVID-19.

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Global construction market inflation

Against this backdrop, 57 percent think market conditions in 2020 have driven up data centre

construction prices. This year we have created an index of construction costs of 40 key data

centre markets globally, up from 32 locations last year, which reflects the growing importance

of secondary markets.

The most expensive data centre market in the world continues to be Zurich, still the epicentre

of European expansion for many global providers and it is set to host a new infrastructure

region for Amazon Web Services from 2022.

Google and Microsoft are also opening new regions with the next few years, as the leading cloud

service providers continue unabated with their expansion plans.

With build costs in California’s Silicon Valley and New Jersey remaining high at

$9.8/w, US hyperscale investment and growth is being focused on lower-priced markets such as

North Virginia ($8.4/w); Texas ($7.7/w) and Arizona ($7.6/w). Markets to watch include Kansas

City and the wider Midwest ($7.6/w) and Atlanta ($7.4/w).

London has overtaken Sydney, Stockholm and Copenhagen this year to reach fifth place in the

table of data centre construction costs, in what is expected to be an extremely hot market

during 2021 as hyperscale investment comes to the British shores, with Brexit a potential

accelerator.

It now costs the same to build a data centre in Frankfurt as it does in Paris, just behind

Amsterdam, as growth continues across the traditional Frankfurt, London Amsterdam and Paris

(FLAP) markets.

The squeeze on development schedules

With the global clamour for new capacity and operators all vying to retain competitive

advantage, schedule and speed to market remains king.

Our survey shows that 68 percent of people across the industry now see delivering data

centres on time as more important than delivering on budget or innovating.

Providers are increasingly needing to push aggressive schedules to bring new capacity onstream

quickly and deliver against their service commitments. They need to have confidence in their

development pipeline and programmes, and data centre contractors who can deliver the pace

required hold commercial advantage – and considerable risk alongside it.

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To be competitive in the current climate, hyperscale data centre construction schedules need to

be condensed from the traditional 15-18 months to 9-12 months. The full hyperscale

development cycle is under pressure to reduce from 24-36 months to 18-24 months.

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Meeting the need for speed

Committing to these aggressive schedule gains requires confidence in a procurement and

delivery model. Within the debt-financed wholesale ‘build to suit’ market, the contractual

hierarchy can be complex.

Yet our research suggests that all data centre owners/operators have their own unique

attributes to delivering their capital programmes. No two organisations have the same supply

chain procurement strategy, approach to design risk transfer or underpinning contracting

methodology.

But seemingly everyone is prepared to adapt in search of the winning formula and the

competitive edge, with 70 percent of our respondents agreeing that more data centre projects

are using alternative procurement and contracting methodologies.

A summary of the results of our online survey of data centre industry players is highlighted

below.

Localisation to enable growth

Future data centre expansion also hinges on tackling the sector’s severe skills shortage. As

an industry, we need to invest in building long-term capability within different global markets.

Regional skills strategies are critical if we are to build greater local resources and skills bases.

Currently, we have a very small, specialised data centre supply chain servicing an enormous,

global market. This needs to change if we are to meet the capacity challenge ahead.

Our survey finds that 84 percent think the upskilling of local workforces will be fundamental to

delivering data centre construction demand in 2021.

In particular, greater localisation will be vital to building future resilience in the market. The

development impacts of COVID-19 would have been significantly lessened if the global industry

was not so reliant on a small pool of specialist talent and the fly-in and fly-out nature of this

expertise.

The pandemic has shone a light on how unsustainable this model is, but also created a unique

platform with which to promote the career opportunities in the sector – and highlight the critical

work and societal progress data centres support.

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Looking ahead to 2021

2021 is going to be a big year for data centre construction, off the back of the boom in site

acquisitions and investment this year, and making up for lost time on site during the COVID-19

crisis. 85 percent of our respondents forecast that data centre construction demand in 2021

will be higher than in 2020.

Growing demand and expanding cloud regions are set to make Europe the number one

investment market for US cloud and data centre operators.

As the market reaches a new stage of maturity, we are going to see continued investment in

the traditional FLAP markets but continued growth and investment in secondary data centre

markets of Berlin, Warsaw, Milan, Madrid and Vienna.

Istanbul and Athens are also attracting greater attention since both cities act as important

strategic gateways into Africa, Asia and the Middle East.

Globally, we see hotbeds of activity in India, Indonesia, Mexico and Brazil in particular.

Auckland is a new exciting market to watch, with Microsoft having recently been granted

approval for a $100m data centre here.

With cloud adoption on the rise across Africa, Ethiopia and Nigeria are also emerging as key

data centre markets primed for growth in 2021.

Across all of these markets, there is huge opportunity for growth, but investment needs to be

matched with a mindful eye on data centre construction costs and supply chain capability.

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Asia-Pacific market insights Jakarta, Indonesia, is arguably the most sought after location in the Asia-Pacific

region for data centres. With its young demographic and projected population growth

of 20 percent (52 million people) over the next 20 years, the demand requirements

are significant.

Japan is seeing high growth at the moment with multiple large scale projects either starting

construction or going through the design process. While power may be cheaper elsewhere in

APAC, Japan remains top in terms of power grid stability.

This, paired with the extremely low-security risk, makes Japan an attractive and ultra-

competitive market for data centre developers and clients.

Tokyo is the second most expensive place to build data centres globally in our index due to

busy market conditions, labour and material shortages, combined with costly design

requirements to build in zones with seismic risk, all contributing to an elevated cost of $10/w.

Singapore remains an HQ for many tech companies. With its ease of doing business and low

taxation, Singapore continues to be a strategic hub in the Asia-Pacific region.

Land availability and local authority restraints remain a roadblock for many, in either entering or

expanding their footprint in Singapore.

Despite the Australian economy currently facing recession, the data centre industry is

weathering the storm and is still considered to be a major growth area for capital investment,

with service providers planning developments in the majority of major state capitals. In

particular, there is a continuing process of redevelopment of existing infrastructure which is

nearing "end of life".

Auckland is a new market added into our index for 2020. New Zealand is seeing a marked

increase in data centre developments, with announcements in May that include Microsoft

establishing their first data centre region in New Zealand, and Canberra Data Centres

developing two world-class hyperscale data centres on development sites in Auckland.

The drivers for this growth include demand from existing customers for data centres in the

region, and the opportunity to accelerate digital transformation opportunities across New

Zealand.

The China data centre market was valued at US$13.01bn in 2019, and it is expected to reach a

value of US$36.18bn by 2025. China’s stride into 5G mobile telecommunications technology

and the booming eCommerce sector is elevating the value of data centres.

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In particular, the eCommerce sector is adopting digital technology for efficient business

processes. More than 70 percent of the population in China are currently using eCommerce

services for performing commercial and non-commercial activities.

In Hong Kong, the data centre sector has been growing quickly. Its colocation data centre

market is expected to reach US$1.7bn in 2023 with an average annual growth of 17 percent.

Korea is internationally recognised for advanced technologies and is one of the key data centre

investment and construction locations in North-East Asia. Seoul and Gyeonggi remain

advantageous locations due to their accessibility and infrastructure, but hold the disadvantage

of poor land availability and higher prices.

The data centre sector has seen tremendous growth in India. A massive rise in internet usage

and a shift to eCommerce platforms for purchases has fuelled the need for data storage.

With a population of 1.3 billion and a data sovereignty act coming in, conventional developers

have diversified into data centres. The most lucrative markets currently in the region

are Mumbai and Chennai predominantly due to power infrastructure and cable landing station

in the region.

Construction market conditions and publicly known projects

We have seen a shift in the route to market for the big four tech companies, with the continuing

trend of ‘build to suit’ leasing models, which has sparked many new data centre developer,

owner and operator providers to enter the market.

This has seen a flurry of new projects being announced which is putting additional strain on an

already struggling supply chain to meet with demand.

Indonesia has seen the most interest with this changing model, with Space DC recently

entering this market, along with a number of other confidential developers following suit.

Japan has seen a huge surge of demand with Airtrunk, Google, Microsoft and Equinix all active

in the market. The construction market has been monopolised by the big five contractors who

have been dominating the data centre construction market.

The high construction cost in Japan is still a restraint for some clients, with the lack of

competitiveness, localisation of design and seismic construction requirements, the cost per

megawatt is the highest in APAC.

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In Australia, the data centre construction market was hot as it entered 2020. Existing major

Australian data centre providers, such as NEXTDC, Digital Realty, Equinix, Global Switch and

AirTrunk have been continuing with their expansion plans, targeted at cloud businesses and

enterprises.

Equinix is actively expanding its footprint in Western Australia, where NEXTDC has likewise just

opened a new facility. CDC is currently constructing one of the largest data centre builds in

Australia in Sydney.

In China, major Chinese telecom and IT players are also looking to scale up their data centres

to ensure stability and reliability of data services, as the application of 5G, wearable devices,

internet of things, and artificial intelligence spurs demand.

Alibaba Cloud has recently completed the construction of three super data centres in Hangzhou,

Ulanqab and Nantong. The company has also announced that it plans to spend CNY 200bn

(US$28.2bn) on its cloud infrastructure over the next three years.

In Hong Kong, Equinix, Global Switch, CITIC Telecom International Holdings, Digital Reality,

China Unicom, Alibaba Cloud, and Tencent Cloud are fuelling the growth in the region.

Korea is seeing more international companies expanding into the market with Equinix opening

its first data centre and Digital Realty currently under construction.

In India, there is approximately 500 MW in demand, of which 370 MW of development has

currently been initiated. The focus for the next few years will remain on the colocation model of

data centre development.

2021 outlook

The data centre construction industry will remain hot across Asia-Pacific going into 2021, with

Indonesia and Japan as the most sought-after markets. India, Korea, China and Australia will

also remain active with a wave of new projects anticipated to start in 2021.

New emerging data centre markets such as Vietnam, Thailand, Philippines and Malaysia are

likely to gain more traction in 2021, with growing local and international demand.

New industrial parks being developed in these locations are providing access to

power, water, utilities, ease of permitting and licenses, which have previously been a barrier

to entry.

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Methodology

To generate the results of our data centre cost index 2020, our proprietary cost model was

updated. The cost model individually assesses each of the six key capital cost headings: shell

and core; equipment; construction labour; construction materials; preliminary costs/general

conditions and general requirements; and margin/profit for each of the 40 markets featured.

All costs are converted into a single currency, in this case USD, using the foreign exchange

rates advised by our economists.

Baseline model assumptions

A greenfield 30MW IT load data centre in the central US region was used as a baseline. It

assumed a power density of 3,000W/m2 with a net lettable to gross floor ratio of 1.8.

Shell and core

Our network of regional offices provided parametric costs (per m2) for actual data centre shell

and core construction expenses, where available.

Equipment

Actual quoted equipment costs have been applied and factored in as necessary. Additional costs

per location are also applied for local sales tax/VAT, import duties and freight.

Construction labour

Our baseline model includes actual construction hours, factored in and categorised by key trade

with associated hourly rates from our local businesses.

A productivity assessment table was developed comparing each of the 40 markets for the

impact of regulations, skills and cultural/religious variances. We have then applied a ratio of

expatriate labour resources anticipated to be involved, resulting in a blended rate.

Construction materials

A material price index was developed using typical material costs in each location, weighted for

relevance to data centre construction.

Preliminaries/general conditions and general requirements

Percentage points were added based on our analysis of tender returns, where possible, for

relevant projects throughout 2020.

Margin/profit

Percentage points were added based on our analysis of tender returns, where possible, for

relevant projects throughout 2020.

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Exclusions

The cost model does not include any client direct costs, land purchase costs, utility works,

groundworks, site works, active IT equipment, fibre cabling to support office fit-outs or

professional services fees.

Online survey

In November 2020, we ran an online survey to gauge the views of data centre sector players on

industry trends. We received a total of 162 responses. Our respondents were based

in/responsible for the following regions:

Find out more our data centre cost index

We are confident that our data centre cost index will become a reliable industry benchmark for

those involved in data centre construction. If you’d like to determine an estimated outturn cost

for your specific project, or to contribute new market information to our model, please get in

touch, we’d be delighted to hear from you.

For further information contact: Dan Ayley

Global head of hi-tech and manufacturing

e: dan.ayley@turntown.com

t: +44 7951 162091

Read the full data centre cost index report online at TurnerandTownsend.com