Tech giants battle for data center real estate in Israel

• Published date: 27 September 2021
• Author: Assaf Gilead

Cloud computing is an area that allows businesses to get rid of a large portion of their IT infrastructure by transferring digital activity to remote computers. Google and Amazon won the Nimbus tender that determined which companies will migrate Israel's government ministries and their auxiliary units, as well as the Israel Defense Forces (IDF), to the cloud, at an expected total government expenditure of NIS 4 billion over seven years. As of 2023, the beginning of their concession period, both Google and Amazon have committed to store all hosted government and defense data on Israeli territory only.

The 2019 Nimbus tender - offered exclusively to non-Israeli technology giants - has become the watershed in everything related to the Israeli market's transition to the cloud. Two years along, it appears that data center investments have become a leading real estate trend. For example, singer Omer Adam announced a data center investment: a partnership with the Europe-Israel Group and others to establish a subterranean data center in Afula.

The business world is moving its local computing infrastructure to remote servers (cloud), due to the economic inefficiencies of maintaining storage, communication, graphics processing and artificial intelligence on company premises. These infrastructures are characterized by high levels of power consumption, special air conditioning needs, on-call computer experts, etc. The cloud computing service industry developed around these needs is led by Amazon, Microsoft, Oracle, Google, IBM, SAP - even China's Alibaba. The potential in Israel is even greater because the country is late - relative to the rest of the world - in migrating to the cloud. Only 30% of all businesses with on-premise computing infrastructures have made the move.

Over the last two years, real estate developers have also discovered the market. The most prominent commercial real estate companies in Israel have already announced their entry into the field: Azrieli, through the acquisition of Compass Datacenters; Red Sea Group in partnership with Avner Papouchado's Server Farm Realty (SFR); Melisron in partnership with Chirisa Capital Management; Gav-Yam (Bayside Land Corp.), which plans to serve its tenants through data centers in its industrial parks; Amot Investments, which plans to build a data center at the Tzrifin Logistics Center. Rani Zim Shopping Centers is also considering investments in this area.

Private equity funds, which generally see Israel as fertile ground for investing in startups, have identified the opportunity. Private equity giant KKR announced it will establish a 10.5 megawatts data center in Petah Tikva, covering 1.2 acres.

Estimates are that the growth rate per square meter of server room floor per year is about 2,000% per year.

This rapid penetration has created much local friction, partly because most of the new construction is being executed by companies with no relevant experience in Israel, or by companies inexperienced in data center operations and maintenance. The public still perceives data centers as harmless, air-conditioned high-tech office spaces, rather than industrial plants, with most ignoring the environmental consequences brought about by this construction.

This could have been prevented by proper regulation by the Ministries of Infrastructure, Communications, Science or the Interior. It would have also helped other real estate companies avoid poor planning. Data center communication infrastructures demand both extremely broad bandwidth and large capacity power lines that are not available everywhere in Israel. This, in turn, requires preparation for both fiber optic deployment, and coordination with the Israel Electric Corp., which does not tend to allocate special power lines if the facility in question is not yet operational.

That a government tender has proved a catalyst for the current furor over server farms has several negative outcomes. The first is the secrecy involved, the second is the poor planning. The terms of the tender were issued exclusively to those international technology giants eligible to bid for tender, and required a minimum annual revenue of $1 billion, a threshold that, from the outset, disqualified Israeli companies. The timetable, construction requirements, and terms of service were kept confidential, even though the tender deals with the future for all national data at all government ministries, as well as the IDF.

If the original intention of maintaining a veil of secrecy was to protect national data, the act of privatizing construction and operation of a giant data center to international tech giants, high-profile construction companies, and plans for densely populated rural areas, has caused information to leak to the...