AI will trigger 'hyper-scale demand' of data centers, says Morgan Stanley's Laurel Durkay

CNBC Television
12 Jan 202403:12

TLDRThe commercial real estate sector, particularly data centers, is poised for robust growth due to the expanding influence of artificial intelligence. This trend is expected to drive significant investment and transform the market, with companies like Digital Realty (DLR) at the forefront, benefiting from hyperscale demand. However, growth faces challenges, notably power availability, as seen in northern Virginia, where Dominion Electric's capacity constraints limit new data center construction. This underscores the importance of infrastructure and power transmission for achieving AI objectives.

Takeaways

  • 📈 Data centers are a booming sector in commercial real estate, particularly due to the rise of artificial intelligence (AI).
  • 🚀 AI is expected to significantly increase the demand for data centers over the next five years.
  • 💹 The growth in data center demand is anticipated to be more robust than any seen in the past two decades.
  • 💰 The expansion of data centers will require billions of dollars in new capital investment.
  • 🔄 Digital Realty (ticker: DLR) is a key player in the data center market, with a strong growth track record.
  • 📊 Digital Realty has seen growth at a rate of 18-20% since its IPO in 2004, outpacing other real estate and the S&P index.
  • 🆕 Digital Realty has a refreshed management team and new joint venture relationships to raise capital for data center development.
  • 🎯 Digital Realty is well-positioned to meet the hyperscale demand for AI servers.
  • 🔌 There are constraints to growth, particularly power availability, as seen in northern Virginia's data center cluster.
  • 🔋 Dominion Electric, a power supplier in northern Virginia, has indicated a lack of sufficient power to support further data center construction.
  • 🛠️ The need for infrastructure and power transmission is crucial for achieving AI goals and supporting data center growth.

Q & A

  • What is the current trend in commercial real estate related to data centers?

    -The trend indicates that data centers are becoming increasingly important due to the growing impact of artificial intelligence (AI) on their demand.

  • How significant is the expected growth in data center demand over the next 5 years?

    -The growth is expected to be more robust than anything seen in the past two decades, requiring billions of dollars in new capital investment.

  • What is the term used to describe the upcoming change in data center demand?

    -The term used is 'transformational moment' for data center demand.

  • Which company is mentioned as a pure play data center company in the bullseye of AI development?

    -Digital Realty (ticker: DLR) is mentioned as a pure play data center company that is well-positioned for AI development.

  • What has Digital Realty's growth rate been since its IPO in 2004?

    -Digital Realty has grown at an average rate of 18 to 20% since its IPO, significantly exceeding other real estate investment trusts (REITs) and the broader S&P.

  • What recent changes have occurred within Digital Realty's management?

    -Digital Realty has a refreshed management team with a new CEO, new CFO, and a new chairman of the board.

  • What is the main constraint to the growth of data centers in northern Virginia?

    -The main constraint is power availability; Dominion Electric, the company supplying power, states there isn't enough power to support the construction of additional data centers.

  • Why is the infrastructure and transmission of power important for AI goals?

    -The infrastructure and transmission of power are crucial for delivering upon AI goals because they support the operation and expansion of data centers, which are essential for AI servers.

  • What type of data centers are particularly needed for AI servers?

    -Hyperscale data centers are needed for AI servers, which Digital Realty specializes in providing.

  • How has the demand for data centers been affected by the growth of AI?

    -The demand for data centers has been growing significantly due to the increasing need for processing and storage capabilities driven by AI applications.

  • What is the broader implication of the power availability issue in northern Virginia for the data center industry?

    -The power availability issue highlights the need for investment in infrastructure and power transmission to support the growing demand for data centers, especially those serving AI applications.

Outlines

00:00

📈 Data Center Boom in AI Era

The paragraph discusses the significant growth in demand for data centers due to the unfolding trends in artificial intelligence. It predicts a transformational moment for data center demand, requiring substantial new capital investment. The growth is expected to be more robust than any seen in the past two decades. The speaker identifies Digital Realty (ticker: DLR) as a key player in this market, highlighting its substantial growth over the past 20 years, particularly since its IPO. The company is described as a pure play data center company, well-positioned for the hyperscale demand driven by AI. The paragraph also touches on the challenges of growth, such as power availability issues in northern Virginia, which could limit the construction of new data centers.

Mindmap

Keywords

💡Commercial Real Estate

Commercial real estate refers to the segment of the real estate market that involves properties used for business purposes, such as offices, retail spaces, and warehouses. In the context of the video, it's highlighted as the prime location for data centers, indicating a shift in real estate trends towards technology infrastructure.

💡Data Centers

Data centers are facilities used to house, power, and interconnect servers, storage systems, and networking equipment. They are crucial for the operation of the internet and cloud computing services. The video emphasizes the increasing demand for data centers due to advancements in AI, suggesting a robust growth in this sector.

💡Artificial Intelligence (AI)

AI refers to the development of computer systems that can perform tasks that typically require human intelligence, such as learning, problem-solving, and decision-making. The video discusses AI's significant impact on the demand for data centers, as AI applications require substantial computational resources.

💡Growth

In the context of the video, growth refers to the expansion and increase in value or size of the data center market. The speaker quantifies this growth by comparing it to the past two decades, indicating an unprecedented boom.

💡Capital Investment

Capital investment refers to the commitment of money or resources into a business or venture with the expectation of achieving a profit. In the video, the need for billions of dollars in new capital investment is highlighted to meet the growing demands of data centers.

💡Digital Realty

Digital Realty is a company that specializes in the ownership, operation, and development of data centers. The video positions Digital Realty as a key player in the data center market, particularly due to its focus on hyperscale data centers, which are favored by AI applications.

💡Hyperscale Demand

Hyperscale demand refers to the need for data centers that can handle a massive amount of data and computing power, typically required by large-scale cloud computing services and AI applications. The video suggests that hyperscale data centers are the future of the data center market.

💡Power Availability

Power availability refers to the capacity of the electrical grid to supply sufficient and reliable power to meet the needs of consumers. The video discusses power availability as a constraint to the growth of data centers, particularly in areas like northern Virginia where there is a high concentration of data centers.

💡Infrastructure

Infrastructure refers to the underlying systems or services that support the operation of a community or industry, such as transportation, utilities, and communication networks. In the context of data centers, infrastructure includes the physical structures, power supply, and connectivity that enable their function.

💡Management Team

A management team refers to the group of individuals responsible for the strategic direction, operations, and administration of a company. The video mentions Digital Realty's refreshed management team as a positive sign for the company's future, indicating new leadership and direction.

💡Joint Venture

A joint venture is a business arrangement where two or more parties agree to pool their resources for a specific project, sharing profits and risks. The video suggests that joint ventures are a strategy for Digital Realty to raise additional capital and develop new data centers.

Highlights

Data centers are the place to be in commercial real estate due to AI trends.

AI's impact on data center demand is expected to be more robust than any growth in the past 20 years.

A transformational moment for data center demand is anticipated, requiring billions in new capital investment.

Digital Realty (ticker: DLR) is a pure play data center company at the forefront of AI development.

Digital Realty has grown significantly, at about 18-20% since its IPO in 2004, outpacing other REITs and the S&P.

Digital Realty has a refreshed management team and new joint venture relationships to raise additional capital for data center development.

The company is well-positioned to meet hyperscale demand, which is crucial for AI servers.

There are constraints to growth, particularly power availability issues in northern Virginia, the largest cluster of data centers in the country.

Dominion Electric, the power supplier in northern Virginia, states there isn't enough power to build more data centers.

The robust demand for data centers is currently challenged by new supply limitations due to power availability.

The underlying need for infrastructure and power transmission is crucial for achieving AI goals.

The market is expected to transform and grow cash flows of data center companies in unprecedented ways.

The AI-driven growth in data centers is a key area of investment and development.

The big players in the data center space are being driven by the need for AI infrastructure.

The discussion highlights the interplay between AI, data center growth, and infrastructure development.

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