What's driving institutional capital’s continued interest in data centers?

December 2, 2022 4 Minute Listen

Lack of power and land availability likely will constrain future supply

Heading into 2023, the North American data center market remains red hot. Demand for capacity more than tripled year-over-year in H1 2022 as companies continued to shift toward hybrid cloud environments in a post-pandemic world. Although large hyperscalers remain the biggest users, the market has also seen a resurgence in enterprise demand. This rapid growth may diminish somewhat in 2023 as less new supply may be delivered due to a lack of power and land availability in major markets like Northern Virginia and Silicon Valley.

Development constrained by power and land availability

Wholesale colocation inventory in primary markets (Northern Virginia, Silicon Valley, Chicago, New York Tri-State, Dallas, Phoenix and Atlanta) has more than tripled since 2015 to 3.71 gigawatts (GW). H1 2022 saw 1,600 megawatts (MW) under construction in primary markets—more than nine times 2016’s under-construction total.

Figure 23: Inventory Growth in Primary Data Center Markets, 2015-H1 2022

Sources: CBRE Research, CBRE Data Center Solutions, H1 2022.

Space and power limitations likely will constrain new development in many primary markets next year. Dominion Energy, the major electric supplier to Northern Virginia—the nation’s largest data center market—has warned that it might not meet power demands in Loudoun County, leading to growth opportunities in other submarkets.

Secondary and tertiary markets will continue to grow as developers seek to expand capacity in markets with power capacity and land availability. Markets like Omaha and Salt Lake City, which possess both these qualities as well as favorable tax incentives, are poised for continued growth in 2023.

Rents expected to rise

The average monthly asking rate for a 250- to 500-killowatt (kW) requirement across primary markets increased by 5.9% year-over-year in H1 2022 to $127.50 per kW. We expect this trend to continue in 2023, with space availability and power having the largest impact on asking rates. We also expect demand, specifically from the hyperscale sector, will continue to outpace supply, creating a rent premium for available space.

Figure 24: Average Asking Rent with Y-o-Y % Change for Primary Markets

Sources: CBRE Research, CBRE Data Center Solutions, H1 2022.

Sustainability front and center for many operators

Data center operators are under tremendous pressure from the government, financial markets and corporate clients to make their facilities more sustainable. In the wake of a megadrought across the Southwest, there is growing scrutiny over the large amounts of water needed to cool data centers. In 2023, we expect more large technology companies in water-stressed areas to employ technologies that use significantly less water, such as direct expansion cooling systems.

Both providers and end users will continue to seek ways to reduce their carbon emissions in 2023. Providers attempting to meet certain carbon neutrality targets want to replace their reliance on traditional, carbon-intensive fossil fuels with clean, affordable energy. This remains difficult amid the sector’s rapid growth and an ever-increasing demand for power. Environmental considerations will likely continue to impact site selection, benefiting markets with an abundance of clean energy like Montreal and Hillsboro, Oregon, while challenging markets with tighter resource restrictions like water conservation in Phoenix and Las Vegas.

Trends to Watch

Demand from Hyperscalers

We expect continued growth of partnerships between data center providers and hyperscale users in 2023. While hyperscale users traditionally have owned and operated their own data centers, many are now leasing facilities as their size requirements grow. Data center providers typically offer faster construction timelines, providing hyperscalers with a faster way to grow.

Power Availability

Power requirements of data center occupiers will grow, leading to larger lease deals in 2023. Power supply constraints will be the biggest impediment to new development in some primary markets like Northern Virginia and Silicon Valley. As a result, hyperscale demand will grow in secondary markets with cheaper land, greater power supply and favorable tax incentives. ESG initiatives will also prompt data center owners to seek renewable and more efficient energy sources.

Lack of power and land availability likely will constrain future supply

Heading into 2023, the North American data center market remains red hot. Demand for capacity more than tripled year-over-year in H1 2022 as companies continued to shift toward hybrid cloud environments in a post-pandemic world. Although large hyperscalers remain the biggest users, the market has also seen a resurgence in enterprise demand. This rapid growth may diminish somewhat in 2023 as less new supply may be delivered due to a lack of power and land availability in major markets like Northern Virginia and Silicon Valley.

Development constrained by power and land availability

Wholesale colocation inventory in primary markets (Northern Virginia, Silicon Valley, Chicago, New York Tri-State, Dallas, Phoenix and Atlanta) has more than tripled since 2015 to 3.71 gigawatts (GW). H1 2022 saw 1,600 megawatts (MW) under construction in primary markets—more than nine times 2016’s under-construction total.

Figure 23: Inventory Growth in Primary Data Center Markets, 2015-H1 2022

Sources: CBRE Research, CBRE Data Center Solutions, H1 2022.

Space and power limitations likely will constrain new development in many primary markets next year. Dominion Energy, the major electric supplier to Northern Virginia—the nation’s largest data center market—has warned that it might not meet power demands in Loudoun County, leading to growth opportunities in other submarkets.

Secondary and tertiary markets will continue to grow as developers seek to expand capacity in markets with power capacity and land availability. Markets like Omaha and Salt Lake City, which possess both these qualities as well as favorable tax incentives, are poised for continued growth in 2023.

Rents expected to rise

The average monthly asking rate for a 250- to 500-killowatt (kW) requirement across primary markets increased by 5.9% year-over-year in H1 2022 to $127.50 per kW. We expect this trend to continue in 2023, with space availability and power having the largest impact on asking rates. We also expect demand, specifically from the hyperscale sector, will continue to outpace supply, creating a rent premium for available space.

Figure 24: Average Asking Rent with Y-o-Y % Change for Primary Markets

Sources: CBRE Research, CBRE Data Center Solutions, H1 2022.

Sustainability front and center for many operators

Data center operators are under tremendous pressure from the government, financial markets and corporate clients to make their facilities more sustainable. In the wake of a megadrought across the Southwest, there is growing scrutiny over the large amounts of water needed to cool data centers. In 2023, we expect more large technology companies in water-stressed areas to employ technologies that use significantly less water, such as direct expansion cooling systems.

Both providers and end users will continue to seek ways to reduce their carbon emissions in 2023. Providers attempting to meet certain carbon neutrality targets want to replace their reliance on traditional, carbon-intensive fossil fuels with clean, affordable energy. This remains difficult amid the sector’s rapid growth and an ever-increasing demand for power. Environmental considerations will likely continue to impact site selection, benefiting markets with an abundance of clean energy like Montreal and Hillsboro, Oregon, while challenging markets with tighter resource restrictions like water conservation in Phoenix and Las Vegas.

Trends to Watch

Demand from Hyperscalers

We expect continued growth of partnerships between data center providers and hyperscale users in 2023. While hyperscale users traditionally have owned and operated their own data centers, many are now leasing facilities as their size requirements grow. Data center providers typically offer faster construction timelines, providing hyperscalers with a faster way to grow.

Power Availability

Power requirements of data center occupiers will grow, leading to larger lease deals in 2023. Power supply constraints will be the biggest impediment to new development in some primary markets like Northern Virginia and Silicon Valley. As a result, hyperscale demand will grow in secondary markets with cheaper land, greater power supply and favorable tax incentives. ESG initiatives will also prompt data center owners to seek renewable and more efficient energy sources.

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