Climate Risk: A Game Changer for Global Data Center Investment Performance

Recent research by First Street has unveiled some startling truths about the modern data center landscape. A staggering 79% of global data center capacity is exposed to high levels of climate risk. This finding raises pressing questions regarding the future of cloud computing and artificial intelligence, which rely heavily on these data centers.

The Scope of the Risk

The First Street analysis scrutinizes 97 global data center markets, unearthing the harsh reality that many of the industry’s largest and fastest-growing hubs are situated in regions vulnerable to extreme weather conditions. Flooding, heatwaves, wildfires, and droughts are not merely distant concerns but actual threats that could disrupt operations, enhance downtime, and inflate insurance and repair expenses.

Over the past decade, the expansion of global data center capacity has been rapid, with projections showing that it could double by 2030. Traditionally, investors have prioritized factors like power availability and demand growth. However, neglecting climate risk could lead to misguided investment choices. With climate hazards directly influencing operating costs and the reliability of infrastructure and financing conditions, overlooking this element is becoming increasingly untenable.

Current Landscape

First Street's findings indicate that over half (54%) of global data center capacity is located in areas facing chronic climate stress, such as extreme heat and persistent drought. These conditions not only elevate cooling costs but also diminish efficiency and strain operating margins. Moreover, the acute climate hazards threatening 79% of global capacity, like flooding and wildfires, can jeopardize operations and significantly inflate costs associated with downtime and repairs.

Interestingly, the exposure to these risks is not uniform. In the Asia-Pacific region, for example, the exposure reaches up to 89% of data center capacity, whereas the Americas sit at 50%, and EMEA (Europe, the Middle East, and Africa) shows the least at 46%. These discrepancies underscore the variability in operating performance across major investment markets.

The Growing Investment Focus

As investment in digital infrastructure reaches unprecedented levels, it’s imperative to recognize that climate risk will increasingly differentiate data center markets. For instance, key hubs like Northern Virginia, Johor, and Marseille are categorized among the most climate-exposed on a global scale, while the Nordic markets display much lower risk.

Dr. Jeremy Porter, Chief Economist at First Street, highlights the importance of location in determining the long-term costs associated with operating a data center. “Climate is a big part of that,” he notes, emphasizing that operational reliability hinges heavily on geographic considerations.

A Shift in Valuation Practices

Traditionally, underwriting processes for real estate assets have relied on historical data. However, climate conditions are evolving in ways that historical records cannot predict. Matthew Eby, the Founder and CEO of First Street, has pointed out that as heat events and droughts escalate, outdated models no longer adequately capture potential risks. Investors who adapt their underwriting and capital allocation strategies to incorporate climate considerations will be better positioned for the future.

Conclusion

The First Street report prompts a crucial reflection on the future of data center investments. As climate risks become more pronounced, stakeholders must reevaluate their strategies and adapt to these new realities. Emphasizing climate-informed decision-making may not only safeguard investments but can also foster a more resilient digital infrastructure landscape.

To delve deeper into these findings and understand their implications better, check out the complete report available at First Street.