10/28/2024 | News release | Distributed by Public on 10/28/2024 15:27
CyrusOne and CEO Eric Schwartz recently provided insights into the data center market on Bloomberg's "Wall Street Week" hosted by David Weston. The segment also featured Waldemar Szlezak, Partner and Global Head of Digital Infrastructure at KKR & Co. Inc.; Christine Wood, Vice President and Global Leader of Mission Critical at Burns & McDonnell; and Larry Fink, Chairman and CEO of Blackrock.
Interview Highlights:
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Bloomberg's segment begins with a discussion with CyrusOne CEO Eric Schwartz about demand for artificial intelligence, propelling the need for massive computer power from data centers, and the need for more data centers. Bloomberg visited CyrusOne's data center in Allen, Texas, a suburb of Dallas. Spanning nearly a million square feet, the Allen data center is undergoing expansion. The state of Texas boasts one of the highest numbers of data centers in the United States.
Eric Schwartz: "When you see the world's leading technology companies who are as close to this as anybody making the scale of investments that they are, to me, that's an extraordinary sign of the potential that they see in the future."
Schwartz says the race to build data centers is only getting started. At the Allen data center, CyrusOne is in the process of adding additional buildings and capacity next to its current facilities.
2:08
Eric Schwartz: "The risk to us as a developer for those customers is to ensure that we can keep up with their demand and that we're delivering both capacity and service at the levels they require. They're all operating mission critical infrastructure and their expectations are intensely high. We do our best and are constantly investing to ensure that we can keep up with those expectations, but our real challenge is to make sure that we're keeping up with their requirements because they're counting on this infrastructure to support the growth investments that they're making."
Keeping up with those requirements is not going to be easy. But the good news for the United States is that it has a strong head start. There are more than 7,000 data centers worldwide with nearly 2,000 in America alone. U.S. data center capacity grew almost a quarter in the last year alone with another 70% set to come on-line from centers already under construction today.
Eric Schwartz: "The United States is a substantially larger data center market than the other regions around the world, and that's driven in part by the adoption of the internet, by the presence of the large technology companies that are based here, but also by the fact that investment and progress against artificial intelligence here in the United States is further advanced than it is in other regions. So, right now, you'll see much stronger demand and growth in the United States. Other countries around the world are very focused on the implications of artificial intelligence and are concerned about making sure they have the infrastructure in their economies to keep up. We are seeing and will continue to see efforts by other countries around the world to support that type of infrastructure in their countries to support their economies and their growth."
4:00
The story segment shifts towards a discussion about the data center market, which includes insights from Waldemar Szlezak, KKR's Global Head of Digital Infrastructure. Global investment firm KKR, which acquired CyrusOne is 2022, is a major player in the data center market.
Waldemar Szlezak: "The U.S., at least from our perspective, is well ahead in terms of the deployment of AI, and I think it is a strategic element of the growth going forward. If you just think about a couple of examples of U.S. cloud companies, about 75% have global market share…In terms of AI funding, 80% of it is coming from the United States. The U.S. is definitely leading the charge in terms of deployment, but I think we see the similar playbook being applied in Europe and Asia Pacific."
In 2022, the U.S. data center market was about 17GW and is projected to hit 40GW by 2030, according to Bloomberg. In Europe, it's currently a 6.6GW market that is estimated to reach 21.7GW by 2030. Asia Pacific is on a similar trajectory.
5:17
Chrisine Wood, Data Center Practice Lead with engineering design firm Burns & McDonnell, discusses the numerous hurdles that data center providers must navigate to find suitable locations to build.
Chrisine Wood: "We're looking at water availability, connectivity, location, demand, latency and then we secondarily look at the regulations - whether or not they have appropriate zoning requirements, tax incentives and whether it makes good business sense to be in that specific location."
She also discusses the strategy of modular design and how that helps circumvent construction labor issues.
Chrisine Wood: "What we're starting to see and what we have been doing, especially with our construction arm, is we really want to get ahead of some of the labor and craft labor shortages…We are designing data centers that are more modular…so that we can deploy these data centers more rapidly and on a scalable basis."
6:25
The largest obstacle for data center providers is access to available power, which must be sufficient - and reliable. According to a report by Goldman Sachs, data centers consume 1-2% of all of the power supplied worldwide, and this number could double by the end of the decade.
Eric Schwartz: "No excuses. The infrastructure that's operating here (in a data center) needs to be available 24 hours a day, 365 days a year, without interruption. Where it starts is for all of the equipment we have deployed here, whether it's the battery banks, whether it's the cooling units…all of that. There's always a backup for that equipment in the event that something were to fail. And things always fail, and you need to have a backup to ensure that you don't have an interruption."
Eric Schwartz says this unprecedented need for reliable power goes beyond just where to get it and how to make sure it's uninterrupted. It also demands an upgrade of the entire way power is generated and distributed in the United States and elsewhere.
Eric Schwartz: "Data centers are effectively technology factories, and like any factory, we draw power to operate the factory. The challenge and the work that we do is to work very closely with the utilities and the grid operators to identify the right locations where we can connect to that power and ultimately deliver it to our customers. This requires work, and it requires a lot of collaboration. The U.S. in particular, and other countries as well, are investing in growing their power infrastructure not only for scale but also for sustainability. We're very focused on making sure we're locating in the right places."
Waldemar Szlezak: "Ultimately, we require a comprehensive solution. The technology companies themselves are large consumers of this infrastructure, but that's not the only demand driver. It's also onshoring, it's electrification…so there are other great signs of economic progress and growth in the United States. We should be really proud of that. But it requires new investment in (power) generation and transmission. It's something that we really haven't really seen over the last 20 years."
He points out that the United States has undergone a positive energy transition during the past 20 years in which coal plants have been decommissioned, natural gas generation has increased, and there is increased generation from renewables.
Waldemar Szlezak: "We think, with this level of growth, the expectation is that the demand side of energy will need to go up 2-3%, which is different than what the industry had seen over the last 20 years. So, we're requiring new generation to be developed and increasing investment in transmission infrastructure to help enable this. From our perspective, we believe this partnership could really create a powerful solution."
10:40
With the increase for the need for power, data center providers are highly focused on sustainability. Christine Wood talks about the benefits of renewable energy and the potential of nuclear energy.
Eric Schwartz talks about CyrusOne's ambitious carbon reduction plan.
Eric Schwartz: "Sustainability has been a focus at CyrusOne for quite some time, and we've already established a target of being carbon neutral by 2030. That was actually an acceleration of our original plan. That involves not only working with the grid and power providers to offset and mitigate any carbon emissions, but we're also working closely with renewable developers to help bring their capacity online and marry that to the demands that we bring. In the longer run, the investments required for the power capacity that's required are substantial.
David Weston: "Does that take us in a direction of self-sustaining in power for data centers?
Eric Schwartz: "Right now, the optimal way for us to operate these facilities is to be connected to the grid, and we're in a position over time where data centers may become a support and contributor to the grid in times of need. Our strategy and our approach maintain and expect that we will continue to be connected to the grid as an ability to access those resources. But also, over the long term, given the scale of the requirements that we have, the likely and efficient solution to this is much tighter coordination between the utilities, the data center operators, and the grid operators to make the use of the resources that are deployed."
Waldemar Szlezak: "We believe, through our portfolio, we've been a very large investor in renewable. We have 10 renewable platforms across the globe, and invested over $34 million in sustainability since 2010, and we think that's an important part of the solution."
14:55
The demand for data centers creates a strong need for enormous capital. This demand has led Blackrock and Microsoft to launch a new $30 billion artificial intelligence fund to build data centers and energy projects to support them. Larry Fink, Chairman and CEO of Blackrock, spoke with Bloomberg after announcing the acquisition of Global Infrastructure Partners, the same firm that teamed up with KKR to buy CyrusOne.
Larry Fink: "There is a giant need to rebuild and build out infrastructure, whether it is digital infrastructure as we are all trying to become more engaged with AI and other forms. We have a decarbonization process. More and more countries are more interested than ever before in energy independence. I'm confident we are in the early part of this infrastructure revolution."
The enormous amount of capital investment required to build data centers is the key reason why CyrusOne was acquired and taken private, said Eric Schwartz.
Eric Schwartz: "The public investor audience (of CyrusOne) was concerned about the volumes of capital required and what that might mean for dilution of the publicly traded equity. In being taken private, with very strong sponsorship and access to deep amounts of capital, we're far better positioned to drive the expansion and investment that's needed to keep up with a very fast-growing industry."
"Our relationships with our customers vary depending on the requirements of the customer and how they intend to structure their own business. But in general, to support the investment that's being made and the ability to access the capital markets, the length of leases for data centers are getting substantially longer. Usually 10 years, maybe 15 or even longer. What that does is give the customer certainty that they'll have access to the infrastructure because they're making investments here on top of the investments we make. And it gives us the ability to approach the financial markets with a dependable and secure income stream that can be financed to raise the capital that's necessary."
18:00
The interview shifts to discuss KKR's view of the industry, its future, how contracts are typically structured and returns on investment. According to Waldemar Szlezak, confidence in the growth outlook for AI and cloud computing underlies KKR's investment strategy in CyrusOne, in data centers, and in infrastructure more broadly.
(For additional reading: "Data Centers: The Hubs of Digital Infrastructure" by Waldemar Szlezak and Managing Director Andrew Peisch, blogging for KKR.)
Waldemar Szlezak: "We have data infrastructure broadly defined, which captures data centers as one of the three pillars, including global infrastructure and fixed land infrastructure. We have four platforms globally."
KKR has over 100 data centers, $40 billion of enterprise value across those four data center platforms, and about $110 billion of pipeline of new opportunities under evaluation.
Waldemar Szlezak: "More and faster is probably the best way to describe the evolution of data center investment over the last few years. But it's a been a progression that I think that we've witnessed, if you just step back a little bit, and look at what has happened in the industry going back to the 90s."
He talks about the evolution from the internet, to cloud, to artificial intelligence.
Waldemar Szlezak: "Most of the data center capacity is built out. It's anchored by a customer contract…We typically lease to hyperscale customers under a long-term take-or-pay contract anywhere from 10-15 years."
"There's a huge capital investment up front, there's revenue generation during the contract term, and, of course, we're making a bet on the capital appreciation."
20:35
The discussion shifts to focus on hyperscalers, a handful of companies that make the bulk of the world's cloud computing. Bloomberg examines the growing data center investments of Amazon, Google, Meta, Microsoft and Oracle which, combined, invested $158 billion in data centers in 2022.
Waldemar Szlezak: "They're thinking about keeping up with their level of growth. Cloud is a business and years ago, it was a $50 billion business (in 2014). Today, it's a $500 billion business and, over the next seven years, is expected to quintuple in size (2032 estimate is $2.5 trillion)."
Addressing a key growth driver in the industry, artificial intelligence, he says the question is are we overinvesting or underinvesting.
Waldemar Szlezak: "If you listen to the commentary of the hyperscale CEOs, they would say the risk of underinvestment trumps that of overinvestment…If you study the prior cycles of technology evolution, whether it's PC, mobile, or cloud, typically Wall Street underestimates the penetration by about 30-40%. If you apply that same sort of analogy here, we're most likely undershooting the ultimate demand need for AI infrastructure."
"The other interesting point is that the customers are incredibly well funded, have very strong balance sheets, and I think are viewing this as an essential strategy to their businesses. We think that it's ultimately a trend that will continue for the foreseeable future."