Next in Tech | Ep. 195: Datacenter Markets

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Eric Hanselman: Welcome to Next in Tech, an S& P Global Market Intelligence podcast where the world of emerging tech lives. I'm your host, Eric Hanselman, Chief Analyst for Industry and Company Data at S& P Global Intelligence. And today we're going to be talking about data center markets and coming back to the podcast to talk about it is Jonathan Schroth.

Jonathan, welcome back to the podcast. Awesome. Thanks, Eric, for having me on. I'm glad to be back. Great to have you here. We have been talking about so many different aspects about data centers, energy, AI, and all of these interactions. But we haven't actually been talking much about Data center markets themselves.

We've been talking about sort of big picture perspectives in the abstract in a lot of cases, but I wanted to dive into some of the specifics about a lot of the work that we wind up doing and looking at data center markets themselves, so I wanted to have you back on to talk about it. Cause there's a lot of activity out there.

Jonathan Schroth: Well, that's right. We've been very busy. We have a global team of a bunch of analysts. We are now tracking almost 12, 000 data centers across the entire globe. I typically focus on North America. In the U S I'm focused on the Pacific Northwest, which includes Washington state and Oregon, two very exciting and high growth markets.

I also cover parts of New England. So, we're looking at mostly Boston for that case. And in that case, which is a very slow growing market, probably one of my most boring markets in the States. I also cover greater New York, which includes Northern New Jersey, New York city, and parts of Long Island and Southern Connecticut, as well as Canada.

And Canada is a really interesting country to cover. It's about five to 10 years behind the data center market in the U S where we're seeing higher growth rates in places like Montreal and surprisingly now Toronto, which being the real economic engine of Canada is perhaps not surprising, and we see a lot of hyperscale activity there.

On the West coast in Vancouver, which is very expensive to build in. We're seeing lower growth rates there. Calgary comes up in discussions a bunch. We've been looking at Calgary as potentially the new Western front of Canada, but the increase in power costs there. which I'm sure we'll talk about is really kind of putting that question into play.

Eric Hanselman: Well, before we get too far along, you talked about how we cover data center markets. I'd actually like for our listeners to go into a little background about what does that really mean? Because, and the backend of what we're talking about for a lot of this is a lot of our market assessments, the data center knowledge base that you're mentioning, about 12, 000 data centers.

But when we talk about covering, you know, what We're actually talking about physically turning up in markets. It's more than just a pencil and paper in terms of doing these assessments.

Jonathan Schroth: Yeah. Like I said, we're really busy. So, when I talk about covering data center markets, we physically go to each of these markets over time.

It depends in terms of who's busy with what, which projects and how we cycle through our list. But ultimately, we spend about a week in each market, and we physically meet and tour with the incentive providers in those markets. And what we do is build a bunch of models that roll up supply, demand, utilization trends, In addition to capturing redundancy models and future power availability to give our clients an idea as to where the market is, is ending up, you know, it's important for us to really get our ears on the ground and get an idea as to where pricing might be headed.

And of course, now with the advent of AI, we're getting a lot of questions as to where GPUs might be showing up. So, we have an idea on that front as well.

Eric Hanselman: Well, because when you think about it, there are a couple of key dynamics, which is for individual data center, how much power do they have access to, how much power are they currently using, how much physical space they have.

But these are the kinds of things that start to change as we look at the shifts in density, that higher performance computing, a lot of the stuff we're using in AI, starts to come into play. That, that really starts to get into some really interesting perspectives about. What the nature of that market is.

And those are specifically the things you're digging into, right?

Jonathan Schroth: It really is. And it's right now in a period here before we hit widespread liquid cooling, I found that space has actually become almost as important as power because some of these GPUs, you can throw maybe two per traditional server rack.

That's a problem because they run very hot, and we are now looking at densities rise above the 10-year average. Um, and we're really looking at a problem of scarcity of space. And I know a lot of forecasts or power I've been thrown out there, but without developing further real estate, we're kind of in this constraint period where we're seeing prices skyrocket.

I was out in Hillsborough, Oregon in April of this year. And I had heard that we're looking at almost 30 percent year over year price increases on the wholesale side. It depends on the provider you're meeting with and the quality of the facility that workloads are housed in, but retail can be up there as well.

Eric Hanselman: Wow. So, and again, as to your point, these are issues that it's finding the floor space, it's finding the cooling capacity, it's finding facilities that have the power as we make the shift to liquid cooling for a lot of these loads, then it seems like there's going to be one more big step function, which is, can the facility actually do liquid cooling, which, you GPU arrays wind up being critical.

Jonathan Schroth: And there's another aspect that is really pressuring the industry. And we track hyperscalers as well. And when we look at the hyperscale facilities that are being self-built, typically away from urban centers, those guys are actually having a problem with labor as well. Places like central Oregon, I find it beautiful, but it takes an extra dollar or two on wages to attract the right talent to these locations.

So as the hyperscalers continue to build out in more rural areas, that's another issue we're discovering as well.

Eric Hanselman: Oh, wow. So set of dynamics. Well, again, so often we get into these situations in which there are all of these complex dynamics in, I don't know, that extended supply chain. And it's not just citing the facility.

Getting power, being able to get all the gear to fill it with, finding the generators for backup. The people that run it are just as critical. And of course, you need people who've got the skills to be able to leverage those capabilities and actually put it to work for the facility to actually be functional.

That's exactly right. So, I'm curious about the markets. You talked about what was going on in the Pacific Northwest, what it looks like, Eastern Oregon, areas of high growth, where, what, what's taking place out there.

Jonathan Schroth: Yeah. The Pacific Northwest is by far my most interesting market. And it doesn't hurt that it's filled with beautiful mountains and volcanoes everywhere you go.

That aside, Hillsboro, which is a suburb of Portland, Hillsboro is located It's to the West up in what folks call the Tualatin Valley. And this market's really grown since about 2010 or 11 or so back when Flexential started the party. We've seen multiyear compound annual growth rates of about 31, 32 percent since about 2017.

Now that growth continues, but we are hitting a bit of a limit to what we can do in Hillsboro, and that is because we are running out of both space and power. In Hillsboro, it really matters if you're within what they call the Hillsboro Enterprise Zone for tax advantages. Oregon has no sales tax, but the Enterprise Zone allows you to save money on property taxes.

That immediate cluster in Hillsboro has now really hit. a wall. There are a few extra now purchased undeveloped land banks in Hillsboro, but what we're seeing are providers starting to develop further west in smaller cities such as Forest Grove, where we are really just finding pockets now of availability on the power and land front.

So my job as an analyst is to look around the area and read the tea leaves to find out where we might be going next. And. If you take a drive around the 12th and Valley, you'll find pretty quickly outside of Hillsborough, it gets pretty hilly and that's going to add to construction costs. So, my bet, our bet really is that in that region, we're going to start seeing some development to the South, potentially down the Willamette Valley.

And that could mean maybe Eugene or Salem. I don't see a lot of. desire for data center operators to move too far away from this area, though, because the Oregon coast is a critical location for the landing of subsea cables. And we're seeing a big pickup in hyperscale development of subsea cables from the Oregon coast landing points abroad, typically in a pack potentially with stopovers in places like California before heading further west.

This place, this market's going to be a hugely influential data center market in the U S for a long time to come.

Eric Hanselman: Oh, that's interesting. Cause if you see the cable landing there, uh, again, that connectivity has become key because again, you've got to be able to move data. You've got to be able to get performant access and low latency access to markets.

I'm curious about. Yeah, because the other thing about that area is that you're on the Columbia River and there's a reasonably abundant hydropower there. But it sounds like the point you're making is that power may also be a concern there.

Jonathan Schroth: Whereas the Hillsborough cluster has had issues sourcing renewable power.

That's not the case, at least in the short to medium term, the further up the Columbia River you go. By the time you get to the DOWs or Hermiston or Boardman or Umatilla.

Eric Hanselman: And this is going East out into Eastern Oregon, which. Exactly.

Jonathan Schroth: Exactly. And this was the point I brought up earlier about the hyperscaler self-developing facilities.

These guys are going nuts. We, we spec'd out what Google is doing in the DOWs, and they are building as fast as they can. It seems like almost they've got every construction worker in the state there. I know that's not true. But they are putting up walls and putting up shelves as fast as they can. A little further to the East.

Same thing with Amazon. Amazon is going nuts as well. And Amazon has plans to develop facilities further East in Oregon. The funny thing is. Amazon wanted to fuel these new sites with natural gas. We know that there is a going to be ultimately in the long run, a shortage of hydropower from the Columbia.

So that moved to natural gas is telling, but what actually happened is Amazon had yanked that deal to purchase natural gas power. And now they're looking at implementing and installing small nuclear reactors. in southern Washington. The reason why they're doing that is because Oregon has a no net new reactor policy on the books.

And this is really going to be the future in that area over the longer term. But the further up you go, the Columbia, you'll eventually head into places like Quincy, Washington, and East Wenatchee. And this is also a very important data center market, but the flavor of it changes a bit. Whereas in central Oregon, we don't really see a lot of third party co location or wholesale providers.

CVV will be the first. wholesale provider in that area. But in Quincy and East Wenatchee, we have a bunch of traditional wholesale and co-location providers that have been there for quite a while. And we're starting finally to see a pickup in growth. And that's in addition to what Microsoft has going on as well in Quincy.

They've been there for quite a while. They've expanded a bunch. And I expect them to continue to build in the area.

Eric Hanselman: Well, so, and actually just a quick thing for clarification for our listeners, for those who aren't aware, just a difference between the co-location and wholesale markets. We've been tossing these terms around and wholesalers, well, the co-location markets are those folks that are creating space.

For whoever wants to lease it much like the, uh, just sort of an open environment, but wholesale is a little different.

Jonathan Schroth: It is wholesale can have a bunch of different flavors to it, but we can have a powered shell, which is basically just that it's the shell with the power. And then the customer comes in with racks and installs the rest.

Or we can just have what we call a turnkey so the client can show up with just servers and potentially not even racks and move in and as the name suggests literally turn the key turn it on and everything's ready to go. Further south in Oregon though it's important to talk about another example of the hyperscale scaler self-developing in Prineville.

Meta has been busy for a bunch of years, and they are expanding very quickly. They like Google and Amazon further to the north have really gone gangbusters and installing a bunch of new buildings on their very large campus there. We haven't seen the same from Apple, who also owns a campus just to the Southeast.

of Betta's campus. They seem to be pretty inactive at the moment. I don't expect that to be the case forever, but that mirrors what we see then their announcements to their public investors.

Eric Hanselman: Interesting. Wow. It sounds like the Pacific Northwest is tearing on along. Now you were talking about, as we move a little further east, what's taking place in Canada.

What's, how do those markets compare and what do you see in those areas?

Jonathan Schroth: Yeah. And instead of going east, I'd actually point everyone's attention to the north. So, connectivity purposes. Vancouver's problem is that it's very expensive to develop in. So real estate prices are very high. It takes three times as much money to develop a data center in Vancouver for seismic hardening reasons.

But despite that, Google recently installed the very first cable connecting Western Canada to Asia. The cable was called Google Topaz. And what this is going to do, in my opinion, is open up a bunch of pent up demand from Asian enterprises to see co location in Canada. And the reason really is for data sovereignty.

And what that really means is in their case to avoid any US Patriot Act issues. So, with that door opening up with a direct pipe from Asia straight into Canada, it's potentially a boon for not just the connectivity sides of Vancouver and Vancouver will always be a smaller market because of those cost considerations I already addressed.

But potentially inland markets such as Calgary and even further to the east, uh, eventually Toronto and Montreal just to access that Asian market. But the problem before we get to Toronto and Montreal and Calgary It's really the cost of power. Since the Russians invaded Ukraine, we've seen a spike in the power prices in Alberta, which is Canada's only deregulated market. 

High power is not exactly what you want to face when you're operating a data center, and perhaps even more concerning is the volatility of power prices. Which Alberta has now shown to be a big problem. So, the jury's going to be out on, on how Calgary advances from here. AWS has already launched the zone from Calgary.

By my estimation, they have now two facilities on the ground with one more to come and potentially others. I expect the other cloud providers to move into the market in to some degree just to address Western workloads. But we really need to be in a different power era in, in, in Alberta, just generally to be able to entertain a greater degree of growth.

And by that, I mean, down the line, hopefully Alberta can focus more on the sustainable energy front. Unfortunately, the political landscape does tilt a bit conservative there. No political comment here, but, but the reality is, is because of that conservative government, we've actually seen a pause in terms of permitting additional renewable projects.

And that doesn't really endorse the market from an investment standpoint, especially from the hyperscalers who are uber focused on, on carbon neutrality.

Eric Hanselman: Yeah, it's going to limit what the potential options are for green power, which then limits growth. Actually, I'm curious, what was the impact of the Russia Ukraine conflict that changed that equation?

Jonathan Schroth: Yep. So, Alberta derives about 91 percent of its power from natural gas. And when Russia invaded Ukraine, we saw a spike in the global natural gas markets. That has since come down. So, what ultimately started the price increase That driver has now faded. But now I'm told that a lack of competition is really driving, is really preventing prices from falling back down.

There are some forecasts that have Alberta's power pricing coming down quite substantially, even from these levels. But it's still around about the price of Toronto. And Toronto is, you know, right now, as it stands, a much more important market just by the sheer number of users in, in Canada's biggest city.

Eric Hanselman: Yeah, it's a population center, so it serves that much, that much larger a number of end users, so that much more valuable as the location.

Jonathan Schroth: And it's also importantly, the connectivity hotspot.

Eric Hanselman: of the entire country. Ah, once again, it all comes back to connectivity. It really does. Well, you mentioned, and so the Toronto market is growing still reasonably healthy in terms of that capability.

It seems like that if you've got the option to be in Toronto with equivalent power costs and much greater potential user base, which seems like a bit of a no brainer.

Jonathan Schroth: Oh, for many years, Toronto was really characterized by its retail co location. footprints, maybe less than a megawatt. Type of deployments.

I mean, I'm really talking about multiple hundreds of kilowatts in terms of scale. Further to the East Montreal for a long time had kind of been the market where larger wholesale hyperscale type of deployments would end up, but we've actually seen Toronto in Montreal blurring the lines, Toronto now has.

A number of partnerships that we've seen between established co location providers and hyperscalers where the hyperscaler will basically hire the co-location provider to go out there, find the space, find the power and build for them. That's been the model for a couple of years now, but now we're even seeing Microsoft, for example, moving in and self-building their own.

There is an old Lowe's big box retailer, a site that they scooped up a couple of years ago. And they, that, that is a, one of their newest sites in the market. So, we're really watching that dynamic. When I look at the States and I see all this excitement about nuclear energy, the Renaissance around that, and potentially SMRs, which is small modular reactors, that's a new technology.

I don't doubt that will be implemented at some point here, but Ontario already has 61 percent nuclear power. And by my understanding, the regulatory hurdles in Ontario, in Ontario are, are much less than what we face in the States. So, the problem with Hyperscaler, and I see the greater Toronto area, I see a win for, for, for everything.

I mean, power, as it stands today, it's not as cheap as, as what Hydro Quebec is selling over. You know, in Quebec, but it certainly isn't Alberta style at the moment. And the volatility is not there either. And in fact, there is a, an ability to participate in the utilities demand response program, where you can curtail, if you can curtail your load from the grid, you'll actually get paid to run your generators.

Now you're typically they're diesel generators and that sounds dirty, but. In Ontario, to be part of that problem, you're actually required to put Doritos scrubbers on your gen sets. So, it does reduce the pollution aspect a lot and seems to be working. So that's all to say that the published industrial power prices actually are a bit lower in reality with the demand response program in effect.

Eric Hanselman: Interesting. So, they're getting into a much more dynamic operating mode for their grids. Interesting to see how that shakes out over time, but to your point, as we look at more options coming online, I don't know, small modular reactors to my mind seems like we're still a ways out there, but certainly I guess in the timescale in which we think of data center development, certainly something to plan for.

Jonathan Schroth: And there's a lot of demand out there. So, we're looking for solutions for deployments today. At some point, data centers and the chips that go inside of data centers, it's all a cyclical business. So, we're waiting for that point where we might have an oversupply condition. We're not at that point yet, but that's something.

For anybody to keep their eyes on.

Eric Hanselman: Interesting. A lot that seems to be going on in these markets.

Jonathan Schroth: And I would take everyone's attention also to the Quebec side of things. Hydro Quebec is really the gem of the Canadian power crown if you will. And. By that I mean, we have a generation apparatus that has been developed over many years, mostly in the 60s, that provides a really robust source of hydroelectricity.

We're talking about 95 percent or so source from hydroelectric dams. The problem as we go on in time here is that we're moving away from And year round oversupply condition to the point where there's a plateau period in about midwinter, call it February or so, where there's just not enough generation capacity between the use of most chemical heating their homes with electricity and the frozen nature of water up on the, um, or no other northerly reservoirs.

And what we're seeing there really is the province is required to import natural gas from New England to meet the residual demand. So, what has really gone on, in addition to another issue which comes down to the generation of hydrogen through electrolysis, the federal Canadian government has committed to providing liquid hydrogen to Germany, really following the Russian Invasion of Ukraine.

And what's happening is that the power supply is becoming less abundant. So, we've seen Hydro, Quebec really look at new data center projects under a magnifying glass. And they're really, you know, if you're not already established in the market, you're really going to be examined quite closely. They're looking for things like.

Can this data center export its waste heat to a greenhouse next door for agricultural purposes or an apartment building or offices? And if you can't do that, which is very difficult to do from an engineering standpoint, if you can't do that, then your chances of getting either power for your current project or perhaps more importantly for projects down the line for expansions.

It's really becoming less of a clear cut open for business model, which was the case back in 2015, 16 more into like what I should go back had to do with the crypto miners, which is to say, we're closing the party, but we'll let you know if you're on the list and then they released the list and if you're on it, great.

If not, you're kind of out of luck, and that's what's pushed, I'd say, the increased demand from the wholesale slash hyperscale side away from Montreal and closer to Toronto, in addition to the connectivity reasons I addressed earlier.

Eric Hanselman: Interesting. That seems like one of those things that Montreal is transitioning from that age of abundance into yet another market that's power constrained.

Jonathan Schroth: And the problem here is I don't think they could recreate what they did in the 60s in terms of developing such a large hydroelectric apparatus. They really, from a natural resources standpoint, you know, I don't want to be too controversial, but they really did things that probably couldn't be replicated today in today's political environment.

Eric Hanselman: Yeah. Yeah. Well, and, and especially if you get to a point at which they're also looking to be able to manage water supply. Those are the things we see in hydro powered markets and a lot of the situations concerns on both sides of both the demand and the generation capacity, because it gets tied to exactly how much water you can push through those dams.

It's a complex set of equations as we deal with in so many of these situations. Oh, it's not easy by any stretch. Well, this has been fascinating, Jonathan. I appreciate you being back to be able to talk about this. Great to be here. I will point our listeners towards a lot of your research, but definitely look forward to bringing you back to see how this is all progressing.

Jonathan Schroth: And one thing to keep your eyes on would be our expanded work on the hyperscale arena. Um, these hyperscalers are buying a lot of GPUs and they need places to put them. And so. We've really, we haven't full sale reset our research process. We are still fully focused on the traditional co location of wholesale markets, but now we've got eyes wide open on what the hyperscalers are doing.

And it should be a very interesting next couple of years as the market kind of finds the equilibrium as to where it's best to put these high-power GPUs. I, in relation to not just training what we're doing today, but ultimately inferencing. So, I expect these data centers to figure out the sweet spot closer to major urban areas while retaining that cost effectiveness on the power front.

Eric Hanselman: Oh, I think there's a whole other episode that we need to do on talking about that. I'm actually just back from the Enact Majlis in Abu Dhabi talking about AI's impact on data center and energy and all the rest. But it sounds like we should be rolling that up to talk about some of those impacts as well.

So it's, yeah, to your point, a lot that's going on there as this market tries to find its feet. I look forward to coming back. Well, thank you, Jonathan. But that is it for this episode. We are at time. Thanks to our audience for staying with us. And thanks to our production team, including Sophie Carr, Feranmi Adeoshun, and Kyra Smith on the marketing and events teams.

And our agency partner, the 199. I hope you'll join us for our next episode, where we'll be talking about trust relationships and financial services. A lot of things we know about know your third party and what is yet another complex relationship.

But I hope you'll join us then, because there is always something next in tech.