GlobalCapital: What are the key factors driving the surge in data centre development across Europe and how is supply keeping up?
Iacobucci: The increase in digitalization and data consumption across different sectors — healthcare, finance, retail, manufacturing — is one aspect. Then there’s the expansion of cloud computing, edge computing deployment and the adoption of AI. All these factors are supporting strong demand for data centres to the extent that developers are struggling to keep up with demand. In addition, the complexity of building a data centre contributes to exacerbate such shortages.
GC: Which regions or markets do you see as the next major growth areas and what’s driving that shift?
Iacobucci: Spain is a strong candidate mainly because it has the cheapest renewable energy in Europe. The Nordic region is another, again because they can provide cheap, straightforward renewable energy. Those Nordic countries also have a track record of developing green, sustainable infrastructure, which makes them a natural location for data centres. There might also be some secondary locations that could become tier-one destinations relatively quickly. I would expect Milan to become tier-one because of the city’s role as a Italian financial and economic hub.
GC: What are the challenges for operators and developers around power, land and sustainability?
Iacobucci: Finding suitable land is not easy. It’s hard to find available land close to city centres. As you move further out land is typically cheaper, but you might have problems around connectivity or energy availability. It can be a fine line balancing all these aspects. In terms of power, affordable clean energy is one of the most important determinants for operators and developers. We have already seen development projects cancelled or delayed because local communities objected.
You see regulators becoming more and more focused on the sector, and really making sure that the construction of data centres is in line with environmental regulation. We had a transaction last year where the Welsh government was happy to provide the land through a long leasehold, but they required the operator to comply with quite detailed environmental rules.
GC: What are the most important trends or risks investors and industry stakeholders should watch over the next few years?
Iacobucci: At the moment the main issues stem from bottlenecks — you simply can’t build fast enough. The problem isn’t just securing enough green energy, but also potential infrastructure limitations that may restrict power availability. That said, I’d also be slightly cautious on the demand side. This is still a relatively new asset class — it’s really only seen rapid growth over the past 20 years or so. We don’t yet have a long historical track record. Potential overcapacity and market saturation in the future are risks to consider as well.
This is also a high-tech sector — and as with any technology-driven market, change is constant. You always have to be prepared for shifts that could disrupt market dynamics. One example is space requirements. As technology evolves, you may need less physical space. Right now, servers take up a certain footprint, but more powerful and compact hardware could reduce those requirements over time. Then there’s regulation and policy. Regulatory requirements are likely to tighten, whether in the form of restrictions on energy or water use, or tougher emissions standards. That too could impact the development outlook.
GC: How will the role of capital markets in funding data centre growth change in the coming years?
Iacobucci: I think capital markets will become an increasingly important source of funding for data centres. Developing this asset type is extremely expensive. And while banks — and to some extent institutional lenders — have played a key role in financing data centres so far, there are limits to how much they can do. Even large banks can’t have their balance sheets overly exposed to data centres. So there’s a clear need to find alternative sources of funding and capital markets are the natural next step. We’re already seeing this trend play out. The number of data centre transactions in the securitization market is growing rapidly and Morningstar DBRS is actively involved through the use of our Rating and Monitoring Data Center Transactions Methodology. And I expect this trend to expand into Europe in the coming months. In short, there’s no real alternative — the sector needs more lenders in order to keep up with the current high demand.