Australia’s expanding data centre pipeline could put significant upward pressure on industrial property costs in Sydney and Melbourne, with competition for land potentially pushing economic rents for conventional warehouses more than 100 percent above current market levels, according to commercial real estate firm JLL.
The firm estimates Australia’s data centre investment pipeline now exceeds AUD 155 billion, making the country the world’s third-largest destination for data centre investment. The capacity pipeline has grown from 451MW in 2015 to 1.2GW today, while a further 16.2GW is under construction or planned, according to its figures.
New South Wales and Victoria account for 91.3 percent of that future capacity, concentrating the impact on metropolitan industrial markets where available land is already constrained. JLL’s modelling indicates that competition from data centre developers could have a substantial impact on the economics of conventional industrial development.
For a standard 20,000 square metre warehouse, economic rents in Sydney’s Outer Central West could rise to 88 percent above current prime rents under a high-growth scenario, while Melbourne’s West could see rents reach 132 percent above current market rates.
The figures represent JLL’s modelling of the economics required to develop new industrial space, rather than forecasts that warehouse tenants will necessarily see their rents increase by those percentages.
Not just land
The impact is already extending beyond land transactions. JLL said major suppliers of data centre components had collectively leased more than 100,000 square metres of warehouse space across Sydney over the past year, while data centre operators were also establishing logistics hubs close to their facilities. Construction-sector occupiers accounted for 177,800 square metres of gross industrial take-up over the past year, or 4.2 percent of total demand – almost twice the 10-year average share.
Rick Warner, JLL Australia director of research and report author, said the modelling showed the structural pressure emerging in the industrial market. “Our feasibility modelling shows economic rents are already 30% to 43% above current market rents in Sydney, and 64% to 103% above in other Australian markets, even before factoring in land premiums paid by data centre developers that will ultimately elevate land values further,” Warner said.
JLL’s Matthew Lee, executive director and co-head of Australian data centres, added: “For investors, I am not concerned at all about having too many data centres in the pipeline, because demand is – and will continue to be – strong,” Lee said. “The greater concern is around the time it will take projects to come to market.”
Lee also pointed to a change in the potential customer base for new facilities, with developers increasingly talking to a broader range of hyperscale and “neocloud” customers rather than a small group of traditional hyperscalers.
The concentration of development in Sydney and Melbourne could eventually encourage a shift towards regional markets, JLL said. Locations with greater land availability and access to renewable energy resources could become increasingly attractive as developers look beyond the established metropolitan markets.
JLL also expects the number of developers operating at scale in Australia to roughly double over the next five years as overseas groups, predominantly from Asia and the US, enter the market.