The Moat Around the Data Center Business Is Only Getting Thicker – And “Capital” (and access to it….) are the new protective sharks in the water

August 12, 2024 | Reading a recent LinkedIn post by the founder of the datacenterHawk group I found perfectly summarized what we are seeing in data centers in 13 short words / acronyms. It read as follows:

Millions --> Billions. Megawatts --> Gigawatts. CPUs --> GPUs.

Welcome to the 2024 data center industry.

Yep! Simply put, it is crazy busy and the capital needs continue to be seemingly insatiable.

CyrusOne – the once public data center company now owned by GIP and KKR – announced last month it had secured a $7.9B line of credit.  With this now complete, the company now has access to almost $10B in capital. This “warehouse” credit facility is one in many financing options the debt markets seem to be throwing the data center sector’s way.

More recently, just this week, STACK Infrastructure (backed by IPI) announced $3 billion of green financing for four U.S. projects. STACK has now secured more than $15 billion to drive the development of its global portfolio.  Yes…$15 billion!

In a period when financial lending institutions’ purse strings are only getting tighter, banks are clearly leaning into this space. And, as we have written about before, the check sizes are getting exponentially bigger, not smaller.

When I was an analyst (four short years ago), the average size of a hyperscaler deal was 20MW or so. In fact, a “really big deal” was in the 35MW range.  Based on our recent discussions with hyperscale data center operators, it seems like 100MW (and a whole lot of vetting!) is the new table stakes when taking on one of the major Cloud Service Providers (CSPs) as a customer.

Rough math, at $10 million cost / per megawatt, that means we are talking $1B of capital needed to build out just one (table stakes) order from the CSPs.  Some would argue given the rising costs of procuring power and the price of land, this $10MM / MW estimate may be too conservative and the ‘real’ cost is closer to $12MM / MW.

While it is a positive that banks are leaning in, not all platforms have all the tools needed to grab such an audience with the lenders. Based on recent conversations and transactions, it seems there are three KEY pillars banks need to see in order to get comfortable to lend to players in the space.  These three pillars are:  land, a hyperscaler contract (bird in hand) and (most importantly) secured access to power. If these three boxes are checked, bank ICs seem to get comfortable and can move fast.

Interestingly, with power being the long pole in the tent, we have seen the emergence of several new “skinnied down” data center plays where companies have secured both the land and power, but have no plans to build.  In this case this land and power access would be marketed to sell to a developer or CSP itself who may want control over its own destiny. Here banks have also shown a willingness to lend but (perhaps not surprisingly) at more onerous terms than where there is an inked 15-20 year hyperscale contract behind it.

Either way – the point being – it is this ACCESS to capital which has become a factor in strengthening the already wide moat around this business.  The key question is will this access to capital become increasingly concentrated around a few of the largest platforms, and if so, will this sector begin to look a lot less fragmented in years to come. The rich may get richer….but there is another side of that coin as well.

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