Long-Term Trends Boosting Data Centers

Michael Tucker mtucker@mba.org

April 13, 2018

Long-term secular and structural trends in countries around the world are underpinning growth in the data center market, reported JLL, Chicago.

Key sector drivers include urbanization and household wealth and technological developments such as smart phones, the rise of cloud computing and the Internet of Things. These technology changes mean the amount of data that businesses and individuals are creating and consuming continues to explode. "That data has to reside somewhere," said JLL Data Center Solutions Managing Director Bo Bond. "So we are witnessing potential hockey stick growth for the global data center sector."

The United States and Canada saw 363.5 megawatts of positive net absorption in 2017, led by data center hubs in northern Virginia, Chicago, Dallas/Fort Worth and Phoenix. Though absorption slipped 8.6 percent year-over-year, 2016 represented a record-breaking year sparked by a cloud-leasing frenzy, Bond said.

Cloud leasing in particular still reigns supreme in most markets, with many cities reporting 25-plus percent of leasing driven by cloud operators, Bond said. "Enterprises across finance, healthcare, retail, consulting and so on are all moving away from self-run data centers [to cloud operations]. Cloud adoption allows enterprises to save money and create a lot more value, so that is a trend we will continue to see."

As demand for data centers grows, supply is picking up apace, JLL reported. Many markets reported a larger pipeline of under-construction inventory at the end of 2017 than in 2016. Nearly 400 megawatts is currently under construction around the world, with North American markets accounting for more than 60 percent of the total.

Data centers are appealing because their long-term operating leases ensure a stable income stream and the sector tends to be less affected by the traditional real estate real estate cycle, improving income stability over the long run. The business itself benefits from a high degree of stability as well, Bond noted. "Data centers handle users' mission-critical information, which needs to run 24/7. The equipment has to be deployed and tested, so once it is commissioned you can't just shut it down, quickly move it and turn it back on. That makes it harder for users to leave once they have deployed."

CBRE Senior Managing Director of Data Center Solutions Pat Lynch agreed the U.S. data center sector continues to thrive, "evidenced by record investment volume and positive net absorption and elevated levels of new supply across the major markets."

Lynch said CBRE has strong expectations for the data center sector "as operators, investors and end-users all seek opportunities to maximize efficiencies, enter new markets and utilize new service offerings."

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