The coming crisis in edge real estate

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The coming crisis in edge real estate

By Hugh Taylor, CEO of Edge Site Partners

As edge computing gains in popularity, the technology is precipitating a crisis in the digital real estate field. Edge computing completely inverts the traditional digital real estate model. The existing Rolodex-based commercial real estate model is not well-suited to this market need, nor will it work at the scale anticipated by the industry. A new digital real estate model is needed to satisfy a market that is expected to comprise tens if not hundreds of thousands of edge sites over the next several years.

The great inversion: How the edge upends traditional digital real estate

The traditional digital real estate business is driven by cost, scale and control considerations. In general, the winning strategy has been to build the largest possible facilities at the lowest possible cost. This is why the major data center REITs build and operate hyperscale facilities outside of metropolitan areas.

There is absolutely nothing wrong with this model, and it will likely endure over the long term. It’s just not suited to the edge. Edge computing is driven almost entirely by considerations of latency. Cost, scale and control are secondary factors in the development and location of edge data centers.

If latency were not an issue for certain use cases, edge computing might not even exist. And, by latency, we’re talking about ultra-low latency. An autonomous vehicle, for example, requires latency of 1 millisecond.

To achieve ultra-low latency across a service area, it is necessary to place compute capacity in locations that are reliably close to the devices that need this kind of fast response. The problem is that the very concentration of user devices that creates the need for ultra-low latency occurs in populated areas — places that are already saturated with developed real estate.

The edge, therefore, will invariably involve placing data centers in existing structures. There will be fewer opportunities to build sites on undeveloped land. This is not an insurmountable obstacle, but it is a situation not well suited for the existing digital real estate business.

Why the existing digital real estate model will not work for the edge

Today’s digital real estate business is defined by relationships, manual processes and one-off deals. This has worked well for hyperscalers, but it won’t meet the anticipated needs of edge computing companies.

Imagine that a company wants to deploy edge computing capacity at the rate of one micro data center per square mile in a city. That would mean that Los Angeles, for example, would need 500 edge sites. This may seem like a high number, but the advent of 5G, with its high antenna density, makes such an estimate realistic or even low when you consider mobile device growth rates.

If you asked a commercial real estate broker in the digital category to find 500 locations to buy or lease for the purposes of an edge center in Los Angeles — and that each site needed to be close to fiber optic cable — this individual would probably hang up the phone and block your number.

A digital real estate broker earns a commission on gross deal value and the earning potential for brokering a deal for a 1,500-square foot micro data center site would be on the small side for such a person. To earn a small commission, the broker would have to comb through commercial real estate listings and manually identify properties with adequate electrical power and fiber connectivity. The owners of these properties would have to agree to lease space to a new class of tenants. The incentive for the broker simply isn’t there.

Solving the problem

Can this problem be solved? The good news is that, in certain cases, it will solve itself. A telecom company could deploy edge data centers to its existing cell tower and switch locations. However, this may be easier said than done in some urban environments. It may also be possible for edge computing companies to partner with retail chains that already have many available locations.

Otherwise, solving the edge real estate challenge will require some innovation and new ways of thinking about digital real estate. Automation of the property search and qualifying processes will be critical to success. It will also be necessary to engage with property owners and educate them about the business value of edge site leasing.

Going further, success in edge real estate will involve rethinking assumptions about control over facilities. In the Los Angeles example, it is unlikely that any one entity will own and control all 500 sites. Sub-leasing of capacity between site owners will become a fact of life for edge computing companies. The process for identifying edge capacity sub-leasing will also have to be automated.

About the author

Hugh Taylor is CEO of Edge Site Partners, a startup focused on solving the real estate challenges inherent in edge computing.

DISCLAIMER: Guest posts are submitted content. The views expressed in this post are that of the author, and don’t necessarily reflect the views of Edge Industry Review (EdgeIR.com).

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