Critical Load: What’s next for data centres and AI?

Andrew Thomas (0:09)

The biggest reason is that it's gone from what used to be a pretty niche element of the telecom sector and the real estate sector now to really the foundational infrastructure component of compute is just so critical for a whole bunch of megatrends that we see in society right now.

James Lineker (0:31)

That's Andrew Thomas, Senior Managing Director at Real Assets Manager Stonepeak, underlining the journey that the data center sector has been on.

Andrew Thomas (0:40)

When you think about cloud computing, when you think about digitalization of enterprises, when you think about the adoption and rollout of AI, the common kind of thread that all of those trends require is just a tremendous step change in the amount of compute that is needed. And that kind of change in demand has led to just a very, very significant uptick really over the last 5, 10, 15 years in infrastructure investment into the asset class.

James Lineker (1:14)

It's not just the long-duration tailwinds and megatrends Thomas has just mentioned. It goes beyond that.

Andrew Thomas (1:20)

You've got mission criticality of assets, you've got very high barriers to entry, very high switching costs, you have improved contract quality as well. Most of the large data centres that are being built right now are being contracted by investment-grade counterparties, some of the largest counterparties in the world, and they're signing 10 to 15 plus year contracts with inflation-linked escalators or at least with 2 to 3% escalators. All of that kind of gives it very attractive infrastructure characteristics.

James Lineker (1:56)

Or, in other words, a lot of reasons for investors to be excited.

Welcome to the final instalment of our four-part mini-series on data centres. If you want to know what data centres are, why they've become one of the hottest investment sectors globally, how deal activity is increasing, what makes an investment viable, how power has become the main bottleneck, and also how it can count to NIMBYism, what the regulators are saying, and how ESG has become central to the sector's future, you need to go back and listen to the previous three episodes. But if you want to know what to expect next, then stay right here. We're looking at the size of the opportunity, returns and performance, how demand will develop, and what's around the corner. I'm James Lineker with PEI Group and The Infrastructure Investor Podcast, and this is Critical Load, Inside the Data Centre Boom.

All right. Let's say we're all sold on the attractiveness of data centres. Let's put some numbers on it. What do returns look like? Here's Andrew Thomas again.

Andrew Thomas (3:10)

When you think about the typical hyperscale investment, you're spending somewhere between 10 to 15 million dollars per megawatt and building out a facility. You're generally looking to build a campus that is going to be at least of 100 megawatts size or greater. Most of the campuses that we look at now, we need scalability to at least 300 megawatts on a single site, based on the feedback that we're getting from our customers.

You're looking at a development cycle that is going to last for several years, from the time in which you can procure power, line up all of the contractors that are required, actually go through construction and bring a facility to ready for service. And from a return standpoint, we're generally looking to sign 15-year contracts with investment-grade counterparties where we're getting a yield on cost that is as close to 10% or above as possible. That will depend on the exact counterparty, it'll depend on the exact market, and it'll depend on time to power. You know, as you approach a commencement date that is sooner, and you have a real imbalance between demand for certain capacity and supply that can bring on 100 megawatts plus of capacity in that kind of time frame, that yield on cost that you can achieve goes up. And so we saw really over the last couple of years, people who had made investments in meaningful amounts of capacity, particularly in tier one markets, and could bring that capacity online in 2025, in 2026, they were able to achieve yields that were into the double digits.

In contrast, when you think about a co-location-oriented data centre, similar to the ones that CoLogix or CoreCite are building, the return profile is definitely different. You're not signing a single contract with a large investment-grade tenant for 15 years with escalators. You're typically signing more four- to five-year contracts. Tenant quality is critically important, but you have diversity of tenant as well. Because of the incremental kind of operating risk or operational complexity associated with having multiple customers, and because you're able to charge higher price points, we are typically aiming for more of a mid-teens yield on cost on the capital that we put in the ground. You're building those facilities almost always in locations that are very proximate to end customers. So we're building them in tier one markets or tier two markets, but as close to a city centre or urban centre or existing data centre cluster as possible. And you're shooting for getting that return profile that adds some incremental return over and above what you build for a hyperscale facility.