Data centre cost trends
Optimism in the face of rising costs
Data centre owners and operators are delivering against higher project costs than ever before, with escalating prices for energy and key materials squeezing historically healthy margins.
Our 2022 Data centre cost index covers 45 key markets for data centre construction around the world, providing an index ranking and an indicative US dollar per watt cost for each location.
Across the board there has been an average 15 percent uplift in local currency construction costs driven by market and supply chain turbulence. However, some Europe, the Middle East and Africa (EMEA) and APAC markets have been heavily impacted by Foreign Exchange fluctuations with the US dollar (USD).
Although construction cost inflation is a universal global challenge, the lagging performance of some currencies against USD is particularly countering some cost increases seen in non-US markets year-on-year, where data is presented in a global context.
This year, Zurich has moved to the top of the table to rank as our most expensive global market for data centre construction. The Swiss market typically has higher construction costs compared to its neighbours. Cost of living is higher, which results in increased labour costs. The pool of contractors capable of delivering large scale projects at pace is small, and the data centre sector is not yet mature.
Singapore (ranked 5th) has moved into our top ten most expensive markets for data centre construction for the first time. This has been partly driven by changes to planning conditions placing an emphasis on energy consumption and sustainability requirements, which has added to costs locally.
It is clear that the challenging economic and political landscape is having a complex impact on data centre construction. 85 percent of respondents to our global survey reported that their local data centre construction market is hot or overheating.
Price volatility and uncertainty of supply is complicating the delivery of projects at a time when most markets are hot with demand.
“Whilst the data centre industry remains on a path of rapid growth, it is also facing headwinds from supply chain bottlenecks, extended lead times for major components, skills and talent shortages, higher and more volatile commodity prices, and rising inflationary pressures.”
Ajay Mangara, Data Centre Lead – Middle East
report that the data centre construction market is hot or overheating
Furthermore, price hikes for commodities like metals and energy are pushing costs for construction materials and components upwards, while supply and demand imbalances are causing delays in lead times.
The data centre industry faces legislative challenges, making it more difficult to get planning approvals in many markets. The sector is also operating around continued logistical disruption, including port closures, scarcity in shipping containers, a shortage of drivers, and increased fuel costs. As a result, freight and haulage availability is low and prices are high.
The general labour market in many countries is also feeling the pinch. There are union pressures on wages, associated with the cost-of-living crisis which drives up the labour cost on all construction projects.
Tender price rises
Our survey has reinforced the view that tender prices for data centres have increased by an average of 15 percent in 2022, with opinion weighted towards an anticipation of further cost increases in the next 12 months.
On average, what has been the percentage change in construction tender / bid prices
report a more than a 15% average increase in tender / bid prices
expect data centre construction costs to continue to rise in 2023
Continued rise of secondary markets
In line with an ongoing trend we have seen in recent years, increased construction activity has been particularly prevalent in secondary, less saturated markets.
With an increasingly constrained Frankfurt market, Berlin has become a hotspot during 2022 given its proximity to important network routes.
We are seeing a similar trend in North America where saturation in New Jersey and Silicon Valley are driving investment outwards to places like Phoenix and Columbus – a new market added to our index for 2022.
Market growth is being led by hyper-scale data centre end users and developers, as established players scale their capacity to meet demand in the system.
New market dynamics
The impact of global supply chain delays is also affecting the contractual terms underpinning construction programmes, resulting in contract disputes that inevitably come at a cost. Our data centre cost index doesn’t account for costs associated with contract disputes, however, clients should be wary of where these issues sit in their overall balance sheets.
expect to see an increase in data centre construction claims / litigation during 2023 relating to cost escalation, inflation and supply chain issues
We expect cost escalation to increasingly impact market dynamics in terms of the pool of active data centre developers and end users in each region.
The impact of construction cost increases on yield for data centre developers will be one of the biggest risks to new construction activity in the sector over the next 12 months.
Business case feasibility for data centre developers is under increasing pressure over the past 18 months. The larger hyperscale end users may choose to prioritise their own self build programmes and alternative procurement models through 2023 and 2024 due to the increased costs of engaging build-to-suit developers.
A positive outlook
Despite the multi-faceted challenges to address, the industry outlook nonetheless remains upbeat.
Respondents to our global survey overwhelmingly reporting that data centre construction has not met demand in 2022, showing there’s plenty of work in the pipeline.
Construction is booming and expected to continue on an upward trajectory, with a majority of our survey respondents viewing the data centre sector as less susceptible to recessionary pressure than other industries. Demand for large-scale computing power is only set to grow, and the consensus remains that this industry is too important to fail.
say that data centre construction has struggled to meet demand over the past 12 months
consider the data centre industry to be recession-proof
© 2022 Turner & Townsend