Images generated by OpenAI’s DALL-E, based on prompts provided by Jayky Wu, RWC Western Sydney
With office vacancies at record highs and a tight market for industrial spaces, the commercial real estate sector faces a turning point, spurred by a 2023 AI boom that demands more data processing power. In Sydney, a city commanding 63% of Australia’s data centre capacity, this shift is evident. Data centres, crucial for our increasingly digital existence, are stepping into the real estate spotlight.
The New Digital Economy and Commercial Real Estate
The digital revolution is reshaping the commercial real estate (CRE) landscape, with Sydney at the forefront of this transformation. As the digital economy expands, fueled by the growth of e-commerce and technological advancements, data centres are emerging as pivotal assets in commercial real estate:
MARKET DYNAMICS
- Data centres are garnering significant interest, with Sydney’s data centre vacancy rate notably decreasing from 17% to 12% in the past six months.
*Cushman & Wakefield Asia Pacific Data Centre Update (August 2023)
INVESTOR CONFIDENCE
- The Macquarie Technology Group’s recent $130 million investment to enhance its data centre portfolio in Macquarie Park is a testament to investor confidence, with AI and cloud services driving demand for advanced data centre capabilities.
- Multiplexes recent completion of NEXTDC’s S3 Sydney Data Centre, a Tier IV, government-certified facility, further underscores the city’s commitment to supporting critical digital infrastructure. This facility not only reflects the technological advancements but also the growing necessity for such sophisticated spaces.
- A Sydney fringe property housing a 3654 square metre data centre leased to TPG for 15 years is on the market with expectations exceeding $45 million. This high-profile sale signifies the premium being placed on data infrastructure in urban locales.
- Goodman Group’s data centre pipeline has been upsized from $30 billion to circa $50 billion of projects, driven by AI.
- Microsoft is preparing construction of its upcoming Kemps Creek data centre in Western Sydney, expected to be worth $1.3b
- Sydney current has over 300,000 sqm worth of data centre infrastructure currently under construction*
Sustainability and Edge Computing
Across the world we are witnessing a push towards sustainable practices, this is exemplified by Hong Kong’s warehouse conversions into data centres. In synergy with sustainability is edge computing:
Edge Computing Explained: Edge computing is a way of managing data and applications that involves doing it closer to where it's needed, which can be near a specific location or the source of the data.
Think of it like this: Instead of having a big, central warehouse where all goods are stored and sent out from (like traditional cloud computing), edge computing means having lots of smaller, local stores closer to where people live. This way, when someone needs something, it gets to them quicker because it doesn't have to travel as far.
In technology terms, this means processing data on local computers, like on your phone or a local network, rather than sending it all the way to a data centre that could be across the country. This can make things like internet searches, streaming videos, or using smart home devices faster and more reliable because the information has less distance to travel.
As businesses increasingly transition to cloud-based models, the push for edge data centres intensifies. These facilities, situated closer to the user, enhance the speed and efficiency of data delivery, addressing the latency challenges of centralised data centers. However, the conversion of existing structures into data centres presents its own set of challenges, including high maintenance costs, noise management, and substantial energy needs.
This ongoing evolution reflects a significant shift as companies divest from traditional data centres and invest in new sites strategically selected for optimal power supply and internet connectivity, paving the way for a new era in commercial real estate.
Images generated by OpenAI’s DALL-E, based on prompts provided by Jayky Wu, RWC Western Sydney
Technological Advancements and CRE Implications
The confusion around energy and the internet extends to data centres. Much of the energy used is not to run the centres but to cool them, according to a new report released just as Chris Bowen addressed the Australian Clean Energy Summit in Sydney
The report, IT & Data Centre Sustainability in Australia, written by Pure Storage and UTS’s Institute for Sustainable Futures, found that Australia is one of the most densely served economies by data centres per capita, with revenue in the data centre market forecast in Australia to pass US$5 billion (A$7.4 billion) this year.
The report raises questions about how well equipped Australian data centres are to manage the onset of El Niño and its dryer, hotter weather. It also raises the possibility that increased energy demand by our data centres could destabilise Australia’s energy grid (which is already happening in Ireland).
Images generated by OpenAI’s DALL-E, based on prompts provided by Jayky Wu, RWC Western Sydney
Challenges in the New Landscape
The integration of data centres into urban and suburban fabrics is not without its challenges:
RETROFITTING COMPLEXITIES
Transforming existing buildings into data centres involves significant structural and systems overhauls. This can include reinforcing floors, upgrading power systems, and ensuring advanced cooling solutions, which can be particularly challenging in older buildings not designed for such purposes.
ENVIRONMENTAL CONSIDERATIONS
Data centres consume vast amounts of energy, leading to increased scrutiny regarding their environmental impact. There is a growing imperative to incorporate renewable energy sources, improve energy efficiency, and reduce water usage within these facilities.
URBAN REAL ESTATE BALANCE
As data centres become more lucrative, there’s a tension between repurposing existing commercial spaces and preserving them for traditional uses. This balance is crucial in urban areas where real estate is at a premium and the community’s needs are diverse.
Future Projections and Real Estate Strategies
Technological advancements like AI and edge computing are set to catalyse data centre growth, influencing real estate development patterns and potentially leading to a reevaluation of property values in areas primed for digital infrastructure.
The landscape of commercial real estate is rapidly evolving with the ascent of data centres. By understanding these trends and preparing for the future, investors and developers can position themselves at the forefront of this exciting era. For further discussion or to share your insights, please reach out to our team.