Data centers. Once a niche part of IT infrastructure, they are now a hot topic in investment circles. Nvidia, which supplies parts for modern cloud storage and data center processing, has now overtaken Apple as the world's largest company. Data centers are also fast becoming one of the hottest investments in real estate. A recent CBRE Global Data Center Survey revealed that 97% of investors plan to increase their capital allocation to data centers this year. This is up from 89% in 2023. CBRE itself sees great potential in the sector and has decided to acquire a data center service provider from a private equity firm.
As with warehousing and logistics in the pandemic era, the possibilities for data center development are endless. Last year, total data center transactions in North America were worth $4.8 billion, up 29% from the year before. Large institutional investors are showing increased interest in data centers. Private equity giants such as Brookfield, Blackstone and Starwood Capital recently announced billions of dollars in data center investments. Logistics company Prologis is launching a dedicated data center division and could become one of the most prominent companies in the sector.
While data center investments are expanding rapidly, so are the energy requirements of new facilities. The massive power needs of data centers from leading technology companies like Microsoft, Google, Meta, and Amazon Web Services are testing the limits of the energy grid. Hyperscale data centers have grown from tens to hundreds of megawatts over the past few years, with some technology companies looking for locations that can deliver more than 1 gigawatt of power capacity. To put this in perspective, 1 gigawatt is enough to power approximately 900,000 homes for a year, roughly the size of a large U.S. city.
Driven by the need to power new AI technologies, the development of these mega data center campuses is leading to creative approaches from tech companies to secure power and tight collaboration between the data center industry and energy companies to ensure the grid stays up. There have been no announcements about gigawatt-scale data centers yet. Still, requests for proposals submitted by major tech companies to developers and requests for grid connection reported by utilities suggest they are coming soon.
Three hyperscale data centers have issued RFPs in the Atlanta market alone, with one seeking 4 gigawatts of capacity. Microsoft and OpenAI are reportedly planning the largest data center mega-campus. The provocatively named “Stargate” supercomputer campus is a $115 billion project that would be one of the most expensive data centers ever proposed, nearly 100 times more expensive than the largest existing data centers. Construction could take up to two years and require a massive power requirement of up to 5 gigawatts.
In the United States, 19 gigawatts are expected to be used to power data centers in 2023, rising to 25 gigawatts by 2026, accounting for about 6% of the country's electricity. Power shortages often force large projects like Stargate to seek their own alternative sources of power, such as nuclear energy. Amazon recently acquired a 1,200-acre data center campus in rural Pennsylvania that will be powered by a 2.5 gigawatt nuclear plant. Where these large new data centers get their power is an important consideration. Power demands are also changing the way new data center developments are designed.
While energy demands are growing, many large technology companies are also committing to reducing their carbon footprint and improving energy efficiency. Data centers are becoming denser, consuming more watts per square foot and emitting more heat. The number of servers per location is also increasing, making the ability to control temperature increasingly important. All these factors are leading to innovations in data center design and construction.
Cooling systems are one of the most critical components of a data center. To increase efficiency and reduce energy usage, more and more data center owners are considering advanced cooling systems such as liquid cooling. Liquid cooling systems also improve reliability, minimizing the risk of equipment failure due to overheating. Meta is reimagining its data centers for high-performance computing and is accelerating the implementation of liquid cooling. In another example, IBM and Schneider are experimenting with rear-door self-contained water-cooling units. In Norway, some companies are using cold seawater or glacial water to cool their data center facilities.
On the construction side, supply chain issues continue to lengthen lead times for facilities. A lack of available land, permitting issues, and community resistance to new development also hinder the construction of new facilities. Developers are turning to prefabricated construction methods. Prefabricated modular designs have reduced construction time, lowered costs, and improved sustainability for many data center developers. One company reported that by using prefabricated building components and modular parts for electrical and cooling systems, it reduced construction costs by 20 percent and shortened construction time from 17 to 11 months for a 45-megawatt European facility.
Another reason for the growing need for hyperscale data centers is nearby power generation. As mentioned in the Amazon example, nuclear power has begun to be seen as a sustainable energy alternative in some developments because once built, it produces virtually no emissions. Nuclear power in large data centers is still in its infancy. Companies are optimistic about the potential of small, factory-fabricated, modular reactors. These reactors are much smaller than traditional nuclear power plants. Many reactors have safety systems that do not require human intervention to shut down, making them safer to use near populated areas. This virtually eliminates the risk of a radioactive event.
Even without AI, the level of data generation is difficult to grasp. Globally, approximately 200 million emails are sent every minute, and over 100,000 hours are spent on Zoom calls every minute. This is just a fraction of the amount of data generated online in a day. This massive level of online activity requires a massive amount of infrastructure, and data centers are the physical backbone of the internet.
Data centers are also one of the most attractive real estate investments at a time when core sectors are struggling. However, these facilities are notoriously energy-hungry, using up to 50 times more power than a typical commercial building. For the data center boom to continue, innovation is needed in the way they are designed and built. This is already happening. The massive data centers of the future will deliver innovations that enable our increasingly online lives. In the process, they could also generate huge profits for the real estate investors who are flocking to the sector.