U.S. Real Estate Market Outlook 2024
Advanced Technology to Fuel Increased Data Center Demand
The data center industry is undergoing significant transformation that is making it an attractive investment opportunity. Historically, data centers were predominately utilized for hard drive storage, computing and network connectivity. While these traditional uses remain, data centers now incorporate new applications like artificial intelligence and machine learning, high-performance computing for genome sequencing or high-frequency trading, as well as other more efficient cloud-based solutions.
From an energy-use perspective, new and innovative ways to power and cool data centers are under development, from alternatives to water-using glycol to using excess heat for greenhouses adjacent to data center facilities.
Pricing Continues to Rise
Data center pricing continues to rise due to limited supply and strong demand. Following a projected 16% year-over-year increase in pricing for 250-to-500-kW requirements in 2023, we expect another 10% to 15% pricing increase in 2024. This is due to supply constraints and continued strong demand across all markets. Operators may be willing to lower lease pricing for legacy assets with vacancy, but this discount will not apply to artificial intelligence workloads that require high power density.
Figure 19: Average Asking Rental Rate with Y-o-Y % Change for Primary Markets
**Rental rates are quoted asking rates for 250 – 500 kW at N+1/Tier III requirements.
New Development Needed
Demand for new data center development likely will attract more institutional investment in 2024, as investors are under-allocated to digital infrastructure by 1.5% to 3% compared with other asset classes. Power supply in primary markets increased by 19.2% year-over-year in H1-2023, leading to a 25% increase in new data center construction activity. We expect construction activity in primary markets to surpass 3,000 MW in 2024.
Construction completion timelines have been extended by 24 to 72 months due to power supply delays. We believe that Austin-San Antonio and Omaha will continue to see significant interest from investors and developers due to land availability, power infrastructure development and tax incentives.
Figure 20: Under-Construction Capacity in Primary Markets
More Network Capacity Needed
As AI becomes more prevalent, there will be an increased need for high-bandwidth network connections to facilitate higher data transfer rates. Large Language Models (LLMs) used in generative AI will require significantly more network bandwidth than currently exists. Major cloud-service providers are becoming more interested in less-expensive rural areas to provide their clients with AI training solutions, although many of these sites require new fiber connectivity. Edge data centers will also play an important role in 2024 due to edge computing reducing latency and enabling AI systems to process data closer to end-users or applications. Smart homes and cities, streaming services, facial recognition technology and autonomous vehicles all benefit from edge data centers because they require low latency to process and react to sensor data in real time.
Additional Power Supply Needed
Increased power supply will remain a big need for the data center industry in 2024. As data center owners and operators adopt more renewable and sustainable energy strategies, increased power transmission and distribution infrastructure will be required.
Congestion, interconnection and build-out issues currently are limiting much-needed new data center development. Congestion on the grid has caused electricity costs to fluctuate wildly in times of high demand. Energy storage solutions can help alleviate this problem. Regarding interconnection issues, the approval process for wind, solar, storage and hydro-renewable projects now takes more than four years on average, with project costs more than doubling since 2020. In addition to delays, renewable energy developers are being asked to contribute capital for the buildout of high-voltage power lines and substations to get their projects on the grid.
Expedited planning, permitting and financing of transmission and distribution would allow for more renewable power to fuel new data center development. Today, there is more renewable capacity in interconnection queues than current generation capacity online.
Markets to Watch
- Northern Virginia: This will remain the top market in North America for new supply.
- Dallas-Ft. Worth: Transmission infrastructure upgrades will provide advantageous conditions for data center development.
- Atlanta: Low cost of power and ample land availability will attract new development.
- Chicago: Hyperscale interest and excellent connectivity provide benefits for continued development.
- Omaha: The local power district plans to increase generation to meet surging demand.
- Austin-San Antonio: Local government incentives are fueling tremendous growth in Central Texas.
- Charlotte: Benefiting from Duke Energy’s power availability and transmission infrastructure, Charlotte is poised for growth in 2024.
- Denver: The market is increasing its data center inventory at an impressive rate.
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