The Resilience of Digitalization
Executive Summary
- Despite the recent deterioration in the macroeconomic outlook, the growth of the information and communications technology (ICT) sector illustrates how important technology has become to societies and how significant associated ICT infrastructure growth is expected to be.
- When it comes to real estate, the ICT sector is the underlying driver of demand for data centers — buildings designed specifically to house computer systems and network equipment to support digital information processing.
- Globally the public cloud services market is forecast to grow approximately 20% per year to reach almost US$600 billion by 2023, and cloud data centers are expected to remain the main growth driver in data center Internet Protocol (IP) traffic.
- This demand for cloud data center capacity is further accelerated by various underlying drivers, particularly among native technology companies.
- Such strong structural demand has been met with significant investment activity in the sector, and whilst this has rapidly driven new supply, supply is expected to soften due to the cyclical slowdown in economic activity and the large rise in construction costs.
- According to current forecasts, North America is expected to remain the largest data center market by commissioned power. But with APAC and Europe set to post stronger supply growth, both will gain market share over the next few years.
- As the pace of development varies across markets, portfolio diversification will be an important strategy for investors as they manage their cash flows, occupancy rates, development and leasing exposures.
- The energy-intensive data center sector is under increasing scrutiny. While there have been successes in increasing energy efficiency, leading data center operators and cloud providers have committed to self-regulatory pacts such as the Climate Neutral Data Center Pact.
- After record-high investment activity, we expect transaction volumes to be down by around 30% from that reported in 2021. Volume is expected to pick up again in 2023.
- After a strong performance in 2021, returns are moderating in 2022, largely driven by yield shift rather than weakening occupier demand. However, strong investor interest points to a bounce back in 2023, in line with an expected improving market outlook.
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