What to Expect in the Data Center Industry in 2022?
What to expect in the data center industry in 2022?
Raymond Hawkins: Welcome again to another edition of Not Your Father’s Data Center. My name is Raymond Hawkins, your host and today we are joined by my dear friend and colleague, Tim Huffman out of Atlanta, Georgia. Tim, once you give us your official title and we’ll get rolling.
Tim Huffman: Hey Raymond, it’s so good to be with you today. Look forward to our chat. My role at CBRE is I’m Executive Vice President Data Center Solution.
Raymond Hawkins: All right, so thank you for that executive vice president. I’ll do my appropriate bowing. It’s good [crosstalk 00:00:50] head data center guy. So well, Tim, for those of you, I’m going to be a little personal before we get into business. For those of you who don’t know, Tim is from my hometown of Atlanta. He and I got to enjoy together our Atlanta Braves winning the World Series. We were not there for the clenching game, but we got to go to the game [inaudible 00:01:07] game three? Did we go to game three? I think it was game three together and pull on our Braves to beat the cheaters out of Houston, Texas and reign supreme. So always fun. So Tim, my son Grant got to go with us too and so the first time in his lifetime that the Braves were champs and he was so funny. Early in his life., he says, “Dad, the Braves have always been good,” and I’m, “No, sweetheart. You’re not old enough to remember when the Braves were terrible.”
Tim Huffman: Right. Exactly.
Raymond Hawkins: But it’s fun now. It is fun now to enjoy how the team came together this year and thank you for joining me and we had a good time.
Tim Huffman: Thank you.
Raymond Hawkins: We thought this was a great time to reflect and talk about how our world has changed. And our world has changed in a lot of ways, but really want to narrow in on the data center business, how COVID has impacted the business, how it’s changed, what you and I do and changed the way we do it and the change the way our customers think about it and would love from your perspective, Tim, just to talk about what you have seen change in the marketplace and before you get into the hey what’s changed in the marketplace, if you don’t mind giving just a couple of minutes background on the role CBRE plays in the data center space, the role you play so people understand the perspective and then I’m going to make you talk a little bit more about yourself too, before we get into what’s changed. So people are going to have to know how many Grammys and all that stuff before we get rolling, but I’ll get to those questions in a minute.
Tim Huffman: Thank you, Raymond. It’s so good to be with you. I mean the short story about our platform at CB is this, that there’s a couple of ways that we serve clients in the data center space. One is in the world of acquisitions and dispositions. So we would call it capital markets. We help people buy and sell data centers, buy and sell land. So there’s that bucket. The other bucket is we have tenants who need the kinds of buildings that Compass builds. And so we’re out in the hunt for what’s the right fit, the right partner and negotiating colocation agreements. We also do some site selection consulting for some hyperscalers. So that’s really the lanes that my team runs in. We probably do a thousand megawatts of projects a year. And then there’s another side under the CB umbrella of facilities management. I think we manage maybe a hundred million square feet of raised floor and so that’s another arm of our business, but that’s kind of 50,000 feet on my team and I and then on the platform.
Raymond Hawkins: Awesome. So from a perspective, you guys see a lot of data center business, a lot of it from both sides, both the very beginning developing, finding land, but also and buying and selling buildings, but also negotiating leases. So you get a complete view of what’s going on globally in the marketplace across your team. Is that a fair way to think about it?
Tim Huffman: Yes, sir.
Raymond Hawkins: Yeah. Yeah. All right. So with that perspective, and I know I keep trying to drag us back to personal, but I should have started here. For folks who don’t know and I know I brag on you all the time, you got to give us a little bit of perspective. Not only are you with the biggest real estate organization in the world, but you’re also the best data center guy in the world so we’ll get to that part. But will you tell us a little bit about you and your singing career? And I mean, it is real stuff, and I think it’d be great for people to realize that you’re not just a data center genius and a pretty face. You also have some of that skills, so you got to share some of that.
Tim Huffman: Thank you. Well, it’s interesting how hard work and God’s blessing how things twist and turn in the journey of your life. And I began my career, as you said, Raymond, in the music business, and it was a passion, something that I loved and I got nominated for a Grammy when I was 22. And then I just worked in the recording, touring, songwriting, performing those elements, basically as a contractor in the entertainment industry and was able to work with some of my great heroes, people that I grew up listening to that were older than I, by 10 years or more, but that had various needs that were opportunities for me. And so I did record or perform with guys in Kansas and that rhythm section and all notes and Crosby, Stills and Nash, the Doobie Brothers and Jimmy Buffet and country artists, and loved it, loved it, loved it, and still do.
Tim Huffman: And it’s interesting because you would, the first [inaudible 00:05:42] would be, “What the hell does that have to do with the data center business?” And the answer, absolutely nothing. A one line on a building or a very strict contract negotiation. All the things that we have to deal with that are technical and business acumen driven really don’t correlate to music, but does correlate, I would say that is a helpful blessing to me is EQ and to have emotional intelligence, to understand how to read a room and how to bring people together. We do these, you do it every day, the very complex transactions. And yet I think 90% of what we do is psychology and 10% is technology. It certainly is technical. Requires a lot of skill, but it’s really about bringing people together and music always worked that way for me.
Tim Huffman: So I still do it in the summers, and I’ll play with Zach Brown and other friends of mine opportunistically, because it is still a passion, but it’s a young man’s game. It’s like being a professional athlete. If you got 10 good years, you did great. And I did it for 20 years and was very thankful. And then candidly, I was just gone all the time, was winking at my wife from television. So I needed to get home. And interestingly where real estate meets technology, the data center world allowed me to have more control over my home life.
Raymond Hawkins: Well, man, I appreciate you, number one, being humble about it. And number two, sharing the story. I’ve got more than one Tim Huffman song downloaded on my phone. I always appreciate when you share stuff with me like that and not only the ones that you’ve labored over and done to record, but also the ones that we got to do with some veterans and just encouraging folks that have lived a tougher road than you and I have. And that to me was so much fun and getting to see how your genius for the gift that God gave you to understand music and understand lyrics and being around your friends that do that. I’m amazed at artistic people. I’m amazed at creative people. It’s a skill I don’t possess and getting to sit in a room and watch you guys do it is just… It gives me such a deep appreciation for God.
Raymond Hawkins: Just like God made somebody a good golfer, he made somebody a good business person or a good singer that you’ve been given that gift of music and it’s fun to watch and I appreciate you letting me see that part of your world even though we met through the data center business. It’s just fascinating to watch and I appreciate your heart to serve with that gift you’ve been given as well. So thank you for that.
Tim Huffman: Thank you, Raymond.
Raymond Hawkins: Awesome stuff. Yeah. Good stuff. Well man, we do sell things for a living and boy, I agree with you data centers. I almost want to echo something. You said 90% of what we do is emotions or reading a room. I would completely agree. We work on very large transactions, very large documents, hundreds of pages, lots of technical stuff, lots of legal stuff, lots of design stuff. But I think every lease I’ve ever had was ultimately signed by a human, a person signed every one of them. None of this was done by a machine and how people feel matters. And I think that listening to people and understanding what matters to them and understanding how it ties back to what their business needs, understanding people and what matters to them, I think is the most important thing we do.
Raymond Hawkins: We got to design good buildings. We got to be competitive in the marketplace and we got to run their technology in such a way that keeps it safe. I’m not discounting any of that, but I ultimately think that everybody’s in the people business and I would agree with your assessment that this is ultimately about listening and understanding and genuinely caring about people. And I’ll say, I think you got to do that for a while before people really believe that that’s your goal. And I watch you and I admire you and see how you do it with a humble heart to serve people and get people to where they feel comfortable what’s going on and I think it’s something that everyone in our space could emulate. So I agree with that. So, transition a little and tell us a little bit about what you’re doing, what you’re seeing and how I know everyone is. COVID’s changed a lot of things, but how do you see our business? How did you see it impacted and what do you think about 2022?
Tim Huffman: Okay. Thank you, Raymond. When I look back on this calendar year and it’s man, it just flew by, didn’t it?Some of the key changes I would say are the level of investment and where it comes from has grown exponentially. Even I sold a pair of cloud data centers in Northern Virginia in June on behalf of a financial services client of ours and broke historic cap rate records and what was unique about that transaction is that of the 25 offers, half of them were foreign investment. And then a big, maybe another half of them were not traditional data center buyers. They were triple net, traditional real estate buyers. So we see money from many foreign capital sources and money that’s not data center buyers. It’s just the real estate community going. “This is a really great spot to be infrastructure.” And then and buildings that have resources like power and fiber that augment the value in a crazy way.
Tim Huffman: But so we see more money and more diversity in the money, whether it’s geographical or what type of buyer are they. The other thing I think that’s been pretty interesting, Raymond is… And everyone’s suffering with supply chain, but right now we’re so busy growing that when we’re doing a couple hundred acre land site on behalf of a hyperscaler, for example, the supply chain for transformers and all things related to the utility are a major bottleneck. And so there’s so much demand for it and I know you guys are phenomenal at the way you manage your supply chain uniquely from anybody else in the industry, so that you’re able to exceed a client’s expectation on a timeline and to deliver. I’m really talking more big picture, because not everybody does it as well as you guys do and then the utilities themselves [inaudible 00:11:44] struggle.
Tim Huffman: So supply chain, as it relates to key ingredients has been an interesting challenge, if you will. And then I think maybe some of the wake up calls during COVID many of them that were network related where our clients either in their corporate owned facilities or they were in office buildings or they were in poor quality colos, they didn’t have their network story buttoned up. And when they had to flip a switch to go a hundred percent remote, among many other things, it got to be a challenge for them. And it was a wake up call for them to understand how important having your house in order from a network perspective is. And so we’ve seen a lot of focus on perfecting that and that, by the way is one of the lines of business that CBRE’s in now. We have a network team that does nothing but manage those processes where you take a client in an audit or in an RFP and negotiate new agreements.
Tim Huffman: So we’ve been incredibly busy with network and I think that’s another standout about what’s different in the world. And maybe the last thing I’d mention, Raymond, is just the, where we see things happening. I mean, I grew up in the Midwest with corn and soybeans and hogs and cows and I just never dreamed I’d be seeing data centers pop up all over these places that are not really historic network hubs and they’re not high tech employee bases and yet we’re seeing massive developments all over the country. So it’s encouraging to me that the data center industry is not being limited necessarily by NFL cities, if you will.
Raymond Hawkins: Yeah. Every data center is not going to land in Northern Virginia, despite what our friends there would have us believe. Yeah. So you raised an issue that I thought I’d like to dig in just a little. You talked about supply chain. I think when we hear supply chain and certainly we hear it on the news, people are thinking about the toys for their kids for Christmas, or they’re thinking about their grocery store shelves and seeing holes or gaps in what consumers buy. And in our industry, we tend to think about it from an equipment perspective. But I think you raise an issue, super valid. It’s not just the gear, it’s the power availability, it’s the network availability. It’s getting all the pieces that make a data center matter, right? If you don’t have power and you don’t have networking and all the things that make the power network work, those all have components and those supply chains are strained.
Raymond Hawkins: And it’s interesting. I think that where, just six months ago, the thing that everybody in our business talked about is what is COVID doing to the industry? And really now it’s about how are we managing the supply chain and how is that supply chain impacting all of our timelines because all of our customers would like their data center delivered tomorrow. And there are so many layers to, how do we manage that? I think you just raised a super valid point that it’s not just the gear. It’s the power, it’s the network. And it’s collaborating on all of that, so that it meets that a building and all the components in the building, the network, all the fiber, all the connectivity, all the equipment for that and the power all converge for them to start to be able to make that facility useful. And it’s not just the gear and that is really, really changing our ability to deliver as an industry and our ability to deliver as providers.
Raymond Hawkins: Is impacted pretty dramatically right now. So, how you see in deal length and the impact of deal flow, it sounds like you guys have already had an accommodation. You’ve said you stood up a network team inside CBRE. What other things do you all see and happen to the length of deals, the sales cycle, the development cycle-
Tim Huffman: Good points. A couple of things, Raymond. In the world of deal flow, we see an increased desire on local municipalities to participate in incentives. And so there are a number of states as you guys know that are ahead of the others with relief on sales and use, but then the real property pieces of it can be a huge impacter. And so we’re seeing municipalities get very aggressive about, according to data center business, which I think is good. That being said in the world of timing and how to get a deal done, it was a challenge for sure in the beginning of the cycle a lot last year.
Tim Huffman: Got better this year and part of it’s limited travel. But if anything, what we seek in some cases created a delay is a lack of inventory in certain key markets and a client will make poor planning decisions, get behind the eight ball and like you said, they want their data center tomorrow. And then they find out that the inventory’s not ready or the supply chain’s messing with it or that thing. So, things do tend to take a little bit longer in general in the COVID season but the demand cycle is so great that I’m incredibly bullish on the industry’s ability to mitigate that in the new year.
Raymond Hawkins: Yeah and you manage through it. I hope. I mean, we look at the supply chain and think this can’t go on forever. I hope that we continue to figure it out as an industry and as a planet, not just for our space, but for everybody. But I do think there’s still going to be some time for correction. I still think that lead times are going to be long and we just can’t make enough stuff fast enough for the demand in our space. You raised another issue, Tim, that I’d like to take a few minutes about. You referenced NFL cities. Certainly we see all the big markets in North America that have lots of activity, Northern Virginia, Chicago, Dallas, the Silicon Valley. Those are all places that we see lots of activity all the time.
Raymond Hawkins: But you alluded to the fact that there are things going on in places that we’d never think about, the corn fields of Iowa, rural North Carolina. I’d love to hear your take as you sit across and see deals from your team all over the world. What do you think? What causes something to land in a network rich, eyeball rich city, and what causes something to sit in a cornfield in Iowa? How do those two happen? How do they both make sense? Can you talk us through that just a little bit?
Tim Huffman: Yeah. Great thoughts, Raymond. I mean, the enterprise for the most part, I think is driven to urban in interconnect hubs, and it’s just the nature of where their employees are and where their existing data center footprints live and the benefits that come with that on an inventory level. It’s interesting to watch how the fork in the road of the colo or the cloud keeps getting a silly current term reimagined, if you will. This idea that everything has to go in the cloud, we see people reimagining that and they’ve even tried it. And it isn’t about a withdrawal from the public cloud. It’s just more about instead of the baby with the bath water all going in, a more thoughtful approach and some of it’s the challenge of the economics that CFOs will put on the IT team. And in other cases, it’s just the reality that it’s not working, especially with some apps that got forced in prematurely. But that being said, we see the enterprise for sure, being big consumers in urban major markets and then hyperscalers and cloud providers who want colo space the same.
Tim Huffman: They love it. They take it. You guys do so much of that, build a sweet business and they’re so good at it. We see a lot of that happening in major markets. And then when you get into, well, what if it’s a hyperscaler, a cloud provider per se who is doing their own thing, the four or five or six of them that do build and own, aren’t as limited by urban geography, but more long haul networks that span the country and they want to create nodes along it. So I’ll use an example. You were on… You talk about Nebraska and Iowa, and then those things began to develop. And the one I didn’t see coming was New Albany, Ohio, where outside of Columbus, this planned community, since the seventies, it’s got thousands of acres of data centers. But the reality is that it sits on that beautiful tweener between the Merck and Chicago and the stock exchange in New York. So there’s some interesting secondary and rural markets that have developed, but I think they’re driven by long haul network connectivity, more than the interconnective and urban plan.
Raymond Hawkins: Well, I think New Albany too, right, is an easy hop to Northern Virginia from a bandwidth perspective too. Certainly has access to Chicago and New York. But I think the fact that it can be spill over capacity. Yeah. The New Albany development has been one that’s interesting to see. Who thought northeast of Columbus, Ohio would turn out to be a significant data center hub, but it certainly has. I think we’re going to see more things like that.
Tim Huffman: Yeah.
Raymond Hawkins: Right. And to your point, too, a master plan community from… I’m pretty sure that their drawings in the early seventies, didn’t say data center.
Tim Huffman: I think you’re right.
Raymond Hawkins: I don’t think that’s… But it is certainly how it has worked out. And we’re up there in a couple of pieces of land there with our good customer AEP who provides power for everybody up there. It’s an interesting market to, right, it’s an interesting development. I think we’re going to see more of that. I apologize, Tim. I didn’t warn you about this, and I am going to go down one path real quick because you have such a great view of the data center business, not just here in North America, but globally. I’m going to touch on one subject. We hear a lot in my business about ESG, everybody talking about ESG and it talks about in corporate America as a whole. And one of the knocks we hear in this space is, you guys consume an awful lot of power, right?
Raymond Hawkins: That our buildings are big power hogs and that is the data center industry a responsible steward of the planet’s resources? And my position on it is, hey, when you think about what the data industry powers, it depends on whose numbers you use, but we’re going to use somewhere between 2 and 4% of the globes’ electricity in data centers. But when you think about how many businesses and functions that are powered by what happens inside data centers, I think we’re really good stewards of that power. But I’d love your take on power utilization, how the industry does. I think there are other things about ESG that matter, but I certainly understand we eat up a bunch of power and how do you think about our industry and being good stewards, how we consume electricity here on earth?
Tim Huffman: Yeah, it’s a great topic, Raymond. So many of our clients are very focused on sustainability because so much power’s involved. And so they’ll have a corporate mandate about whether it’s water or electricity or air quality carbon stuff, it’s all very important. And when I think of the real estate classes, industrial office retail, and then if you hold data centers off as a fourth category, data centers, even though they consume an inordinate amount of power per square foot, our efficiency with it is incredibly sophisticated and candidly much better than office retail or industrial. In part because the math is so big, it requires a discipline just to get to a good OPEX number, but the ability to use free outside air, even in a place like Phoenix on a summer night, it’s amazing how our industry has been very aggressive about cooling as a metric and has reduced the PUE of the utilization efficiency into the low 1s.
Tim Huffman: And so it’s incredibly… It’s a great example of how data center industry are good stewards. And then as a group, we’ve driven a lot of recs, a lot of opportunities where green energy can be bought by a client or a co-op. And so I would suggest that our industry is actually a really good steward of the power that we do use, for sure.
Raymond Hawkins: Well, yeah, I appreciate you expanding it not just to the electrons, which is, I think a lot of people think about low electricity, but water utilization and air quality, I think, right, necessity is the mother of invention. I think that’s the phrase. And because we use so much power our industry has taken the responsibility to say, “Hey, we got to be good about this,” and have driven all kinds of efficiencies around how do we cool the space? I mean, I love your example, right? We’re using outside air in Phoenix in the summer at night, right? We’re doing everything we can to think about how do we effectively minimize the cost and minimize the impact on our electrical grid to run these facilities that run an inordinate number of businesses and enable a lot of things?
Raymond Hawkins: It’s funny. One of the analogies I give folks is I’ll ask, “Hey, what do you guys do?” And I say, “Look, pick up your phone and anything you do on your phone happens in one of our buildings.” So when you order Uber Eats, it happens in our building. When you order a movie that’s happening in a data center on Netflix, when you’re trying to drive somewhere on ways that’s happening in a data center. All of that stuff that you think about every day that you think, “Hey, it’s just happening on my phone.” That’s running in a data center somewhere and that data center is being an incredibly wise steward of the resources it’s using because it’s using them on an extremely large scale and it recognizes how important it is to be good stewards of that.
Raymond Hawkins: And I think our industry in spite of using a lot of power has led the way in all three of those areas of saying, “Hey, we got to be good about this.” And I like your perspective as a real estate guy to see office and retail and industrial and us as a different pillar. I completely agree. And not just an opportunity for us to hug each other, but I think it’s important. We talk about, “Hey, this is important,” and we’re trying to not just run our business, but we’re trying to enable so many other businesses and do it with good stewardship around the resource [crosstalk 00:26:08] we’re given, so. Important stuff. And I’m excited to see what the future is, right? I mean, today, we power everything with off of the grid, but, right, things are coming, right.
Raymond Hawkins: Who knows what’s going to happen with the way hydrogen works and the way other things that we’re thinking about, ways to power things and to reject heat? Our industry’s out on and immersion cooling, right? That’s a whole different way to reject heat. I mean, there’s just unique things coming and excited to see what necessity breeds in our industry as it gets bigger and as we face the reality that we got to be good about the resources we’re utilizing. So cool stuff there.
Raymond Hawkins: Well, man, you mentioned briefly the CBRE operations side of the business. Any other parts? I loved your conversation about the networking piece and that you guys see that as an area where you can help your clients. Other things I love to have a CBRE commercial, if you don’t mind, as overt as that is. What other things can we talk about that you guys do better than anybody in the industry? I know your whole infrastructure management, property management, building management is one side. What other things should people think about when they see those four green letters?
Tim Huffman: I mean, when you think about our world, Raymond, of data centers, we look at IT spend as a percentage of revenue compared to say, real estate spend as a percentage of revenue. And typically in an enterprise, real estate will spend about 3% of revenue, and IT will spend three or sometimes double that if they’re in services client. So the money getting spent on the environments that are data center related is huge. And the stuff that goes in them is huge. And so sometimes what we’re doing, Raymond, is essentially a baseline understanding of a customer’s data center footprints and helping them find efficiencies, consolidate, recontract, buy or sell and I’ll use one specific example with the sale leaseback. It’s become a quite popular way for an enterprise that overspent and underutilized their own corporate data center and they don’t have to face the pain of remove and they essentially bring the colo to them.
Tim Huffman: They’ll find an investor and/or an operator who will come and buy it. And they may leaseback all or part of it for a period of time. And it’s a painful process for them to do the write down, but it’s more painful to be underutilizing and fully paying for it and operating it. And so it’s a great fix for a poor strategy, if you will. So those are examples. I think portfolio optimization, consulting, and then exercises that are as much financial as they are technical in sale leaseback.
Raymond Hawkins: I love that phrase, “bringing the colo to us.” I hadn’t heard it put that way. That’s a great way to think about it, to take that asset that at one point may have been the right size for you and today it’s not. And how do you financially engineer getting what you need out of that facility and unlocking some of the value for someone else? I love that. Bring the colo to us. That’s a neat way to think about it. All right, Tim, I’m really going to put you on the spot here. Is there a guitar in your office?
Tim Huffman: [inaudible 00:29:23] There is. Yeah.
Raymond Hawkins: A-ha. I thought there might be. Is there any way possible we could get you to sing one chord of something? I don’t care what it is but if there’s a guitar in your office you got to sing one thing for us as a way to sign off so people really believe me when I say that you are a spectacular musician, so there’s got to be-
Tim Huffman: All right. Let me grab it.
Raymond Hawkins: I’ll fill some air while he goes and gets a guitar. But I am not kidding when I tell you that Tim is a world class musician and has played with unbelievable talent all around the world and recorded with them and he appears on albums. Like I said, Grammy nominated. So, I get the personal pleasure of getting to listen to Tim play and watching him create songs one on one and thought we’d share a little bit of that here. I know I’m putting him on the spot. So this was not rehearsed. He was not aware, but give us something of what you’re going to do, and this will be our way of signing off.
Tim Huffman: Oh, how about if I do a little bit of a Christmas diddy for you?
Raymond Hawkins: Ooh, Christmas, come on now.
Tim Huffman: How’s that?
Raymond Hawkins: [crosstalk 00:30:25] 16th.
Tim Huffman: [inaudible 00:30:27]
Raymond Hawkins: My second favorite holiday, certainly grateful for the birth of Jesus and for getting to celebrate with family at the end of every year.
Tim Huffman: So James Taylor and Ricky Skaggs did this duet several years ago and there was a band in the seventies called Orleans. I don’t know if you remember. Remember Dance With Me?
Raymond Hawkins: Mm-hmm (affirmative).
Tim Huffman: So they had tons of hits. And there was a guy in that band named John Hall and John and his wife, Joanna, wrote this song that James Taylor and Ricky Skaggs… It was just a little… I’ll give you a part of it.
Raymond Hawkins: Don’t worry folks. Tim’s going to [crosstalk 00:31:05], not me.
Tim Huffman: [(singing)00:31:16]
Raymond Hawkins: There we go. Folks, Merry Christmas. My friend, Tim Huffman, like I told you, he’s not just a pretty face. He’s not just a great real estate advisor. Gifted musician and a wonderful human being. Tim, I love you. I’m so grateful you joined me today. Hope you and yours have a great Christmas. Thank you both.
Tim Huffman: You too. Love you. Thanks, Raymond.
Raymond Hawkins: Thank you.