Data centers are finding new homes in old buildings
Investors are reducing the lead time for new data centers by converting old buildings
As the demand for data rises, investors are opting to convert old office buildings or empty warehouses into data centers as a quicker, more cost-efficient alternative to new builds.
In Hong Kong, for instance, logistics real estate manager ESR acquired a cold storage facility last year and is converting the brownfield site into a 40-megawatt data center after recently receiving permission from the town planning authority.
In the U.S., the 15-story Union Bank Tower, a 54-year-old office building in Portland, Oregon, is being sold for repurposing into a data center facility.
The construction for a new data center can take up to 26 months, and that excludes the permitting process, says Chris Street, Managing Director of Data Centers, Asia Pacific, JLL.
But the types of conversion investors are currently pursuing usually take only around one year to complete.
“This rush to bring new data centers onstream stems from the need to cope with the rapid digitization and surging demand for online and digital services,” Street says.
Looking for more insights? Never miss an update.
The latest news, insights and opportunities from global commercial real estate markets straight to your inbox.
The cost of data center conversions
Besides the shorter timeline, another push factor for investors to pursue conversion is the potential savings, with costs going to building modifications rather than building a facility from ground up.
The savings generated can be used to offset the surge in raw material costs — exacerbated by supply chain disruptions — which has led to overpriced installations in data center projects, according to JLL’s H1 2022 Global Data Center Outlook.
This makes conversions, which require less materials than new builds, an attractive lower-cost alternative that limits exposure to these material inflation challenges.
In densely populated cities like Hong Kong, however, it can quickly become cost-prohibitive to convert an existing building into a high-rise data center, according to Street.
“The structural additions needed to modify an office building can be quite complicated,” he says. “For instance, these buildings typically won’t have the sufficient slab-to-slab height clearance that is a prerequisite for high-density data centers.”
For emerging markets, especially in Southeast Asia, the lack of suitable brownfield sites with the right structural attributes, most of which are aging and underdeveloped, also poses issues for operators seeking to convert old buildings into hyperscale data centers.
But such structural attributes are just part of the key considerations for site conversions. “Other than getting the physical structure right, ensuring the availability of access to power, water sources, and fiber connectivity is equally critical to the success of the project,” Street says.
Finding the right site that meets all criteria for conversion presents a major challenge due to differing needs of operators.
“Such conversions may not necessarily be suited for hyperscale developments which are driving the market, but enterprise or retail colocation operators could stand to benefit from projects coming on stream,” says Street.
Data center shortages
In the Asia Pacific region, demand is still outpacing the current supply pipeline, indicating the trend of conversions will likely persist.
“Two of the main drivers are hyperscalers from the U.S. and China, such as Amazon and Alibaba, and the start-up ecosystem in the region, which is home to many super apps built on the cloud,” says Street.
Asia Pacific grew to become the largest data center region in the world two years ago and continues to expand at a compound annual growth rate (CAGR) of up to 16% year-on-year, according to data from Structure Research.
“Within the region, we are still completely underutilized and undersupplied in terms of the long-term aspects of digital infrastructure,” says Street. “We expect to see more conversions taking place, particularly in markets like downtown Jakarta, Kuala Lumpur, and Taipei due to the interconnection needs.”
What’s your investment ambition?
Uncover opportunities and capital sources all over the world and discover how we can help you achieve your investment goals.