Could urban malls in APAC be the next data centre frontier?

Could urban malls in APAC be the next data centre frontier?

Urban malls within the Asia-Pacific region have been under pressure over the past decade with the rise of e-commerce, and this disruption has ever more so been accelerated by COVID-19 with strict social distancing and consumers largely staying home over the past few months. But is the urban mall now in permanent decline, or are there avenues that landlords could explore to stage a comeback?

Firstly, we believe not all malls are created equal, and those properties located within close proximity to transport hubs in urban areas will continue to remain resilient and attractive options for the shrinking pool of retail tenants; much like a gravitational centre for retail activity. However, this would come at the cost of those generally smaller urban malls located on the periphery of this centre which would face more challenges in filling out their properties. This could subsequently become a slippery slope as the prolonged high vacancies would lead to a vicious downward spiral with high vacancies leading to higher vacancies; shoppers are less likely to visit a mall with insufficient retail options, leading to overall lower centre sales and the eventual departure of tenants from said poor sales. As such, we believe data centres, with the right tweaks, could present a synergistic opportunity for such malls to consider in their search for a new lease of life; plus it does bring some poetic justice where the disrupted embraces its disruption.

Why have data centres not been more prolific in urban areas?

Urban planning authorities generally scoff at the idea of building a data centre within an urban setting given its modular big-box design, which could aesthetically conflict with the cityscape; especially within the Asia-Pacific region where its cityscapes tend to be more vertical in nature. Furthermore, data centres have a low propensity to generate human activity given that they run efficiently on a small crew of employees. Hence, dedicating large urban sections for its use could have potential economic detriments to the surrounding area.

For investors, the economics of paying a lower land cost for a greenfield site outside the city limits compared to an urban greenfield location simply outweighs the latency benefits of being located close to its general customers. Hence, this is why data centres have traditionally been located within industrial zones or housed in retrofitted in factories located far from the general population.

Figure 1 A typical data centre big box design

We do acknowledge the fact that large data centres in the hyperscale classification would probably be best located outside the urban sprawl. But with the advent of edge computing, the low latency requirements of 5G and the rise of latency-sensitive operations such as autonomous transport; the need for smaller-scale data centres as supporting infrastructure is starting to gain more importance. Hence, this is where we believe the urban mall, with its rising vacancies, could step in to fill the gap.

Synergies between a mall and data centres

A retail mall and a data centre have much in common in terms of the requirements needed for them to operate. These include:

1. Large column-free floorplates

A retail mall’s floor plate is mostly column-free (if you strip out the dividing walls between units) which data centres prefer to maximize their modular server racks.

2. Adequate floor to ceiling heights

A mall’s floor to ceiling height is typically between 4 to 5 metres (12 to 15 ft) which is similar to the requirements for data centres given its need for raised flooring and maintaining the space required for the mechanical and electric systems house in the ceiling.

3. Cooling and heating systems

A mall would need a reliable heating and cooling system, to maintain a comfortable environment, which is a requirement for data centres.

4. Fire safety systems

Both malls and data centres are required to have proper fire safety systems (e.g. sprinklers, fire curtains, fire barricades).

5. Security features

A mall generally has several security features such as close circuit cameras and 24/7 security—also a requirement for data centres. 

6. Adequate fibre connections and power supply

Malls located within urban areas would have access to its fibre infrastructure, which is required for a data centre to operate. Furthermore, most urban fibre infrastructure is embedded underground, which adds reliability for the data centre. Most malls also have backup power generators as part of their operational protocols, given the need to keep their shoppers, employees and products safe in the event of a power failure, which is also a requirement for data centres.

Overall, while many of these would still require some upgrading or customisations to fit a data centre’s needs, it would still be overall cheaper compared to the operator embarking on a complete overhaul.  

Prospects for landlords

With mall landlords facing an uphill task in trying to balance, on the one hand, maximising their rents, and on the other, keeping their malls fully occupied amid an industry that is losing market share to e-commerce. The prospects of a reliable long term tenant such as a data centre operator, who would traditionally have significant fit-out sunk costs, and thus be relatively stickier compared to a traditional retailer, providing a regular flow of income is an attractive proposition. Furthermore, having a stable and visible long term cashflow stream would mitigate the mall’s overall risk profile which in turn could be an attractive factor for would-be investors.

As a scenario, take for example a multi-floor urban mall with 6 to 8 floors, including basements, plagued with a high vacancy rate. These vacancies would generally be on its less productive upper floors (L4 to L6) where rents are generally at a fraction of its main floors (B2 to L2) and foot traffic lower; unless there’s a lifestyle attraction such as a cinema (which is now also struggling to survive). The landlord could potentially lease out large, cordoned sections (or entire floors) to data centre operators and refocus their efforts on managing their lower, more productive floors.

Challenges along the road ahead

While the prospects of a colocation data centre house within the urban retail mall does look enticing, it is not without its drawbacks. Most pertinent is the willingness of landlords to accept such a tenant, given the likelihood of a long committed lease and the foregone upside if the retail industry were to stage a comeback, and the unfamiliarity it brings compared to that of a traditional retail tenant. However, for those malls in undeniable decline, this could be a (or the) potential lifeline that could turn things around.

Next, the type of data centre operators would be limited to those in the Tier 1 and 2 classifications given the mall would unlikely have power redundancy protocols which are required for Tier 3 and 4. This would limit the type of clients the data centre operator is able to target. However, given its urban setting, it should still remain an attractive option for clients, such as small to medium enterprises, who require a cheap and secure data solution (compared to the Tier 3 and 4s) or those with edge computing requirements.

Going forward, we believe the trend of data centres moving into urban settings is likely to continue as the edge computing phenomena and requirements for low latency networks continues to grow, and the urban retail mall with its synergistic and cost-efficient prospects for data centres puts forward a strong case for being its natural host.