Data Center Demand--and Supply--Grows

Michael Tucker

March 14, 2019

Strong data and technology demand pushed the North American wholesale data center market to records for both demand and supply in 2018.

Surging demand from hyperscale cloud providers led to a record 303 megawatts of absorption in the seven primary U.S. data center markets: Atlanta, Chicago, Dallas/Ft. Worth, New York tri-state, northern Virginia, Phoenix and Silicon Valley [Calif.], said CBRE, Los Angeles, said in its Data Center Trends report.

"Hyperscale" data centers can expand and contract capabilities as their client's needs change, CBRE said.

Unlike most commercial real estate sectors, data centers are benchmarked in the megawatts of electricity they consume rather than by square feet. A megawatt powers 4,000 servers.

Everett Thompson, Senior Vice President with Colliers' Data Centers Consulting group, called data centers the utility of the future. "Hundreds of billions of dollars are being spent here, and the yields are higher than most other investments in real estate," he said, noting investors typically build to a 12 percent cap rate or higher and then lever up to a 5 to 6 percent cap upon stabilized occupancy. "These figures far exceed those of traditional real estate and data centers are also a hedge against recessions, since most are considered mission critical to the operations of the tenant," he said.

JLL, Chicago, called the data center sector's fundamentals strong and said an "insatiable" demand for data center space is driving the sector's robust growth. Research firm Research and Markets, Dublin, Ireland, predicted the data center market will grow at a 28.8 percent compound annual growth rate between 2016 and 2020.

"The strong demand recorded in the first half [of 2018] continued to year-end, with increased cloud activity across data center markets," the JLL Global Data center Outlook said, citing 775 MW of data center absorption worldwide, led by the U.S. and Canada's 509 MW of absorption followed by the Europe-Middle East-Africa and Asia-Pacific regions. Worldwide demand increased by 191.5 MW year over year, the report said.

The data center pipeline remains very active as well, both JLL and CBRE said. At year-end there were 549.7 MW under construction across the world and 265.7 MW in North America, JLL noted.

"To put the scale of development activity into perspective, the amount of under-construction capacity in northern Virginia is more than the existing inventory of any data center market in the U.S.," CBRE said.

Last year North American data center investment volume exceeded $12 billion, CBRE noted. As investment increased, capitalization rates for stabilized data centers dropped, approaching the typical 5.5 percent to 7.5 percent range seen in other industrial properties, the report said.

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