CoVid 19 is one of yet multiple indicators showing the global economy – like society as a whole – needs a powerful digital infrastructure if it wants to provide growth and prosperity in the long run. However, the current pandemic crisis represents a catalyst increasing the speed of change and, in particular in Germany, has brought up the topic of digital infrastructure and data centers, and made it a subject of public discussion. The topic´s ambivalence is obvious: While many German companies are struggling with digitization, German fiber network access for households (FTTH) remains at a low 12 percent. Yet, at the same time, Germany beyond its borders is known for an excellent fiber optic network, state-of-the-art data center space and, referring to De-CIX Frankfurt, hosts the world’s largest internet node in terms of data throughput. Peak traffic at De-CIX reached 9.1 Tbit / s in March 2020 and 10 Tbit / s in November last year – both rates representing world records.
Frankfurt´s and thus Germany´s transformation into an international digital hub has historical, but above all geographical and geopolitical reasons. Typical for real estate, Frankfurt´s location also is decisive for data centers. Nodes where submarine cables land or, as in Frankfurt, where the world’s fiber optic backbones cross, are predestined as an exchange platform if they also offer a business ecosystem. That eco system needs to include international companies as well as SMEs, and an end customer base possessing economic strength, as well as qualified employees and specialized service providers. Metropolitan region Rhine-Main represents such an ecosystem. The international banking and digital infrastructure heavyweight counts almost six million inhabitants, including three million employees in a widely diversified economic landscape. In addition, the location as such is geographically well positioned: The region represents the middle of Europe, where data streams meet originating from across the Atlantic (via England / London and the Netherlands / Amsterdam) as well as data streams originating from Scandinavia and Southern Europe. Those are linked with Mediterranean submarine cable hubs, which in turn connect Germany with Asia and Africa.
All of that explains why regarding Frankfurt business premises international players in the data center industry are willing to pay 2000 € / m², ten times the local standard for commercial property on the outskirts of Frankfurt. Taking into consideration the horrendous investment costs of a data center itself, which (without the cost of the property) can quickly run into three-digit million figures, and considering high level sales and distribution requirements, it becomes obvious why the data center asset class – despite massive, sustainable growth and downright fantastic returns – in large parts remains in the hands of specialized REITS such as Digital Realty, KeppelDC REIT as well as telecommunications groups such as NTT and 1 & 1. Those vehicles in turn own or rent to colocation providers such as Interxion, Equinix or Maincubes, which again in turn provide server space for companies and hyperscalers, i.e. cloud providers such as Amazon AWS.
Given that background of specialists and global players, the question arises whether the entry barriers for capital, market penetration and know-how for SMEs, project developers and non-institutional investors are not already too high to jump on the bandwagon.
Today, large cloud providers like Microsoft (Azure), Google and Amazon AWS, are securing their oligopoly position in metropolitan areas. With the establishment of availability zones growth of colocation providers in Frankfurt is leveraged, same as in the Rhine-Ruhr and the greater Berlin area, in Hamburg and in Munich. The cloud hype in addition is reinforced by efforts of the EU and its Gaia-X program. Yet, many technologies that are currently evolving, like 5G, autonomous driving and IoT, are exemplary, and require a high density network of data processing and storage levels, small data centers within a distance of less than one kilometer (Edge), regional sub-hubs (Fog) and international (cloud) hubs, a structure resembling a distribution network in logistics.
Apart from a few European metropolitan regions, the Rhine Main area is currently anything but comprehensive and thus offers considerable potential for regional players – like energy suppliers, project developers and property / real estate owners as well as SMEs. Regardless of investment costs being considerably even when it comes to smaller data centers, in areas outside of Frankfurt, it is possible to keep investments low due to lower property costs and modular construction methods – without at the same time having to forfeit latest, environmentally friendly technology and scalability.
Sustainability or ESG is a topic already playing a central role when it comes to data centers in Germany. The issue is driven by corporate responsibility, legal requirements, or simply out of economic reasons. Germany with its ultra high energy prices even on a global level does not exempt data centers from the EEG surcharge, an additional cost factor punishing high energy consumption. In addition, power grid expansion in some metropolitan areas is not keeping up with demand, representing a significant challenge in particular for Frankfurt. Precisely that creates opportunities for regions where energy supply is a given, or, like in Northern Germany, where a surplus of alternative energy is found. Integrating data centers into local structures – waste heat utilization, smart energy storage, charging infrastructures, etc. – will transform data centers into ESG supporters, and stop them from being marked part of a problem. This integration, however, requires the involvement of local and regional actors – and offers them the opportunity to participate in data centers and the profits they produce.
It can thus be stated that data centers can be highly interesting not only as the basis of digitization for society in general. Also, they represent an asset class for open minded, modern companies and investors. All of that works even on a small scale – given the right approach to the market and technology level are provided. And what´s more, a number of regions in Germany, today still white spots for international providers, with their innovative companies and qualified employees, can set up a link to the world, and enable regional actors to design digital infrastructures on a level playing field with international players.
Michael Jakobi, LL.M. is a consultant and project manager in the field of digital innovation & infrastructure at contagi Digital Impact Group – www.contagi.ch