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U.S. Data Center Market On Pace for Another Record Year

Cloud Users Drive Leasing, Analysts Say
September 7, 2018
The U.S. data-center market, fueled by surging demand from large users of the cloud, is heading for a record year in terms of leasing, surpassing 2017’s benchmark activity.

Based on a report by CBRE, a leading commercial real estate brokerage services and investment firm, and backed by observations by CoStar Market Analytics, the growth is paced by key data center regions across the country such as Northern Virginia and the Dallas area.

The market in the first half of the year had more than 177 megawatts of net absorption, measuring the change in existing or commissioned wholesale power capacity, already almost two-thirds of last year’s annual record total, "despite the delivery of significant new supply," CBRE said in its latest "U.S. Data Center Trends Report." And the pace isn’t expected to wane, officials at the brokerage firm said.

The yardstick for this commercial real estate segment is power, with data center power measured in kilowatts (KW) and megawatts (MW).

"We do not expect to see a slowdown in demand from cloud users in the near future, as end-users continue to migrate their IT needs to the cloud to save costs and for added flexibility," Pat Lynch, a senior managing director for CBRE Data Center Solutions, said in a statement.

The findings are in line with what CoStar market analyst Omeed Naderi is seeing. "I would absolutely agree that the market is strong," he said.

Despite the delivering of new supply, "positive net absorption resulted from strong demand from hyperscale cloud users for deployments often in excess of 3 MW," the report said. In Northern Virginia, the world’s largest data center market according to the report, 65 percent of its net absorption came from hyperscale cloud users, which the report defines as multi-megawatt users, typically 5 megawatts and more.

The demand for data centers is being driven by the increase in e-commerce, as well as more cloud computing and storage, according to Naderi.

Northern Virginia, as well as Phoenix, Dallas / Ft. Worth, Silicon Valley in Northern California and Austin / San Antonio, Texas – among the primary U.S. data center markets – had the most leasing activity for that category of facilities in the first half of the year, according to CBRE.

The strong demand has resulted in more than 474 megawatts of capacity being developed in the major data-center markets – which also include the New York Tri-State region, Chicago and Atlanta – with nearly 55 percent of that preleased, CBRE's report said.

Northern Virginia and its Loudoun County have become data-center powerhouses. Some 70 percent of the world's internet traffic flows through Loudoun, according to Naderi.

"Data centers are going to be extremely valuable, and Virginia has carved out a niche," he said.

Part of the reason why Northern Virginia has become a data-center hub is because there is open land available to build, according to Naderi. Google has purchased 90 acres in the area to develop two data centers, and Amazon has also bought a parcel for a data center, he said.

This demand is driving up land prices in Loudoun County, with some acres there selling now for $1 million a piece, Naderi said.

U.S. data center investment volume hit $7 billion in the first six months this year, according to CBRE, not on pace to hit 2017’s record level.

"While 2018 investment volume may not reach 2017’s record-setting investment of more than $20 billion, we still expect the investment market to produce strong results, driven by sale / leasebacks from enterprise users, cloud users looking for development partners and a continued influx of new investors into the data center sector," Lynch said.

In the Tri-State region, which includes New York, New Jersey and Pennsylvania, demand from financial firms led to positive leasing momentum for data centers, according to CBRE. That market’s 2.5 megawatts of net absorption brought its vacancy rate down to 14.2 percent, CBRE said.

That strong leasing demand in the region helped prompt a lift in data-center construction activity, with the pipeline increasing to 16.5 megawatts, led by Iron Mountain Inc. of Boston, Digital Realty of San Francisco, and QTS Realty Trust Inc. of Overland Park, Kansas, according to CBRE. And more than 23 percent of this under-construction capacity is preleased, which represents the highest level of preleasing in three years, the report said.

"In-market expansions, primarily from financial and health-care companies, should result in additional absorption for the remainder of 2018 and into the first part of 2019," Jonathan Meisel, a senior vice president with CBRE’s East Brunswick, New Jersey, office said in a statement.

In its report CBRE also presented data-center market snapshots for the first six months of 2018.

» Atlanta: Positioned for growth, with a record 21 megawatts under development.

» Chicago: The delivery of new supply outpaced demand in the first half of the year.

» Dallas/Fort Worth: One of the few data-center markets to have "contiguous availabilities" for future on-site expansion, making it well-positioned for larger hyperscale deployments.

» Northern Virginia: Had the strongest start of any U.S. data-center market with net absorption of 100 megawatts.

» Denver: Absorption levels "matched historical annual averages."

» Houston: Had a relatively slow start as new development stalled, but is enjoying new demand from health care, transportation and cryptocurrency providers.

» Seattle: Absorption was more than double that of any previous half-year.

» Southern California: Leasing activity was mainly led by technology, entertainment and health care firms.

Linda Moss, Northern New Jersey Market Reporter  CoStar Group   
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