At least 84 commercial buildings nationwide have been abuzz during protracted COVID-19-related business shutdowns. They house the data centres that have literally underpinned the continued functioning of Canada’s economy and Canadians’ interconnectedness during the past weeks.
Even before a global pandemic wreaked havoc on the commercial real estate market, a handful of U.S. based data centre REITs dramatically outperformed office and retail REITs in that country’s FTSE Nareit index last year. JLL reports the five specialized REITs collectively delivered a 44.2 per cent return in 2019.
“Data centres have been in strong demand from the rapid growth in cloud services, especially with the growth in data and knowledge sectors and companies outsourcing. They are being used by various industries such as grocery fulfilment, retailers and banks,” says Kruti Desai, manager, national research insights, with Altus Group. “From an investment perspective, based on expected continued demand, data centres are still highly sought after, offering an alternative investment product and stable returns.”
Two data centre REITs — Digital Realty Trust and Equinix — hold properties in the Greater Toronto Area (GTA). Both sustained a drop in share price over the first three months of 2020, but both report revenue growth compared to the first and fourth quarters last year.
Equinix, which has two data centres in downtown Toronto, also reports a 20 per cent increase in internet exchange traffic over Q4 2019 and a 44 per cent upward spike from Q1 last year, “reflecting the impact of the sudden global shift to remote and work-from-home practices”. Yet, like conventional real estate providers, much remains dependent on stability all along its chain of users and suppliers.
“The full potential impact of the COVID-19 pandemic on our financial condition or results of operations remains uncertain and will depend on a number of factors, including its impact on our customers, partners and vendors, and the impact and functioning of the global financial markets,” the REIT’s recently released Q1 results state.
“While we have not experienced any significant business disruptions from the COVID-19 pandemic to date, we cannot predict what impact the COVID-19 pandemic may have on our future financial condition, results of operations or cash flows due to numerous uncertainties,” Digital Realty Trust’s Q1 report similarly notes.
Looking back just six months ago, Digital Realty, which operates two data centres in the GTA suburban cities of Markham and Vaughan, ranked Toronto in the top ten of 60 major international hubs for the digital economy. Based on indicators for economic growth, business and consumer demand, supporting infrastructure, labour force skills, openness to innovation, governance and quality of life, Toronto was also projected to nudge up two places on the so-called Digital Capitals Index, into 8th spot by 2029.
Cloud operators active in Toronto, Montreal and Vancouver
The two REITs’ holdings represent four of 33 data centres currently operating in the GTA and an even smaller fraction of national stock. Desai projects large cloud service providers will gain a greater market share as organizations increasingly outsource their in-house data management services, and keepers of highly sensitive information, such as insurance and financial services and health care provider, become more confident in these third parties.
“Cloud providers are attempting to meet the needs of higher compliance standards by offering more secured services aligned with FIPPA (Freedom of Information and Protection of Privacy Act) or PHIPA (Personal Health Information Protection Act) in Ontario,” she says. “Demand for data centres will likely remain high, but it is expected that the demand will mostly come from large cloud service providers.”
That’s already the case in Toronto and Montreal, which, together, are home to about 70 per cent of Canada’s data centres. Vancouver has the next highest concentration with 10, then there are four each in Calgary and Winnipeg.
“Toronto has experienced significant positive net absorption primarily driven by west coast U.S. based cloud operators. Montreal continues to grow and will further expand as telecommunications connectivity continues to improve. Demand is also primarily from U.S. west coast technology corporations,” reports Conan Lee, who is based in Seattle as managing director of JLL’s data centre and telecommunications advisory services. “Two major builds are occurring outside Vancouver to result in what will be the largest delivery of supply that British Columbia has ever experienced. The developments will be a true test to the theory that there is pent up data centre demand in this region.”
Among emerging trends, industry analysts like David Cappuccio of Gartner Research & Advisory point to something of an equivalent to last-mile delivery, which he terms an “infrastructure delivery strategy”.
“This puts workloads and data where they make the most sense for the business. Rather than data centers, we are moving toward centers of data, placed and optimized to provide the most business value. This also expands the role and responsibilities of central IT to one of a business enabler, rather than a purveyor of equipment and software,” he submits in a 2019 report entitled Infrastructure is Everywhere: The Evolution of Data Centers.
COVID-19’s longer term impact on that evolution is still to be determined. In the short term, data centres have clearly experienced surging traffic not recently seen on highways.
“Many companies’ technological capabilities have been tested as they’ve been forced to transition their employees to work from home and, for some, their overall digital strategy has been called into question,” Desai observes. “COVID-19 has pushed the workforce rapidly toward the digital economy.”