The growing reliance on digital technologies and the expansive generation of data have spurred investments in large data storage infrastructures. The Canadian Investment Review’s 2024 Investment Innovation Conference brought attention to this trend, focusing on how increasing connectivity and vast content creation are propelling data center market expansion. Nick Minto, the senior vice president of commercial real estate at PIMCO, noted the significant surge in cloud storage solutions as enterprises continuously evolve their data handling strategies. Hyper-scalers—large enterprises that dominate the cloud computing market—have experienced between 17 and 30 percent growth year-over-year, accumulating nearly 150 percent growth over five years. This surge is anticipated to persist due to the continuous rise in data generation.
The Influence of AI on Data Center Requirements
Emergence of AI as a Driving Force
Artificial intelligence has become a pivotal driver in the data center industry because AI training and inference operations require substantial data facilities. The complexity of AI models necessitates advanced infrastructure, including large-scale training campuses, which depend heavily on abundant renewable energy and government investment. These operations have escalated demands for better data infrastructure, pushing the capabilities and resources of data centers to new heights. In addition, inference centers must be situated closer to end-users to ensure low latency and real-time processing, creating logistical challenges but also opportunities for innovation within the data storage sector.
This rising AI demand has led to persistently low vacancy rates in data centers. Approximately 12,200 megawatts of data center capacity are installed in the U.S., with only 200 megawatts available for new use. Similarly, Europe holds around 4,600 megawatts of capacity, with just 100 megawatts available. This substantial gap between supply and demand has created a conducive environment for rental growth, with rents increasing by 10 to 12 percent over the past year. As AI technologies continue to expand and integrate into various sectors, the strain on existing data center resources will further drive market expansion and investments.
Navigating Infrastructure Constraints
The heavy demands placed on data centers by AI have also highlighted issues related to infrastructure constraints. The bulk of Europe’s data capacity was previously concentrated in five primary hubs—Amsterdam, Dublin, Frankfurt, London, and Paris, collectively known as Tier 1 markets. Each of these cities boasts over 400 megawatts of installed capacity. However, power limitations, rigorous planning permissions, and regulatory conditions have started to stifle further development in these areas. Governments have imposed restrictions on new constructions to manage power consumption and environmental impact, compelling data centers to explore alternative locations.
Consequently, data centers are increasingly moving towards Tier 2 and Tier 3 markets such as Madrid, Milan, Warsaw, and Berlin. These markets encounter fewer permitting hurdles, enabling quicker development timelines, and benefit from strong governmental endorsements. Additionally, these markets are appealing due to the potential for generating skilled jobs and tax revenue, which make local governments more supportive of data center expansions. The pivot to these regions alleviates pressure on Tier 1 markets while taking advantage of the growing digital infrastructure needs in underserved areas.
The Push for Digital Sovereignty in Europe
Storing Data Locally
An additional driver for data center distribution within Europe is the advocacy for digital sovereignty. European governments have increasingly called for data to be stored locally to ensure security and control over sensitive information. This demand comes in response to concerns over data privacy and compliance with stringent regulations like the General Data Protection Regulation (GDPR). Currently, only 20 to 30 percent of European data is stored within the continent, pushing authorities to mandate the creation of sovereign clouds. Sovereign clouds are specific data storage solutions that comply with national or regional regulatory demands, ensuring that data remains within the jurisdiction.
Mandatory digital sovereignty regulations have prompted a redistribution of workloads from Tier 1 markets to Tier 2 and Tier 3 markets, which offer fewer developmental constraints and have the capacity to accommodate new construction. These regulatory measures provide a structured framework that aligns with local laws and consumer privacy expectations, making data storage both secure and compliant. Furthermore, the establishment of regional data hubs is creating a diversified data storage landscape that enhances resilience and reduces the risk of data breaches.
Benefits of Redistribution
Artificial intelligence is now a key driver in the data center industry due to the significant data requirements for AI training and inference operations. The complexity of AI models demands advanced infrastructure, including large-scale training campuses reliant on renewable energy and government investment. These increased demands have pushed the capabilities and resources of data centers to new levels. Furthermore, inference centers need to be closer to end-users for low latency and real-time processing, presenting logistical challenges but also opening avenues for innovation in the data storage sector.
The growing AI demand has resulted in persistently low vacancy rates in data centers. In the United States, there are approximately 12,200 megawatts of data center capacity, with only 200 megawatts available. Europe has around 4,600 megawatts, with just 100 megawatts free. This significant gap between supply and demand has created a favorable environment for rental growth, with rents rising by 10 to 12 percent over the past year. As AI technologies continue to grow and integrate across various sectors, the strain on current data center resources will further drive market expansion and investments.
