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North America Data Center Trends H1 2023

September 6, 2023 10 Minute Read


State of the Market

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  • Supply in primary markets increased by 491.5 MW (12%) in H1 2023 compared to H2 2022, and by 738.2 MW (19.2%) year-over-year.
  • An all-time high of 2,287.6 MW was under construction in primary markets, a 25% year-over-year increase. Strong demand and developer appetite continues to drive new construction. However, a lack of readily available power and extended lead times for key pieces of electrical infrastructure are delaying construction timelines.
  • Primary market absorption was resilient in H1 2023 despite complex supply-side challenges. It totaled 468.8 MW, compared to 484.8 MW absorbed in H1 2022.
  • Preleasing activity in primary markets is strong, with 1,673.1 MW (73.1%) of the 2,287.6 MW under construction preleased. Hyperscalers are securing space 24 to 36 months in advance of delivery.
  • The overall vacancy rate for primary markets remains near a record low, at 3.3%. Northern Virginia’s vacancy rate is 0.94%, the lowest of all U.S. markets.
  • AI is driving demand across most major markets. Many AI startups are seeking large requirements between 5 to 25 MW.
  • Most major markets are grappling with power constraints. Data center operators are prioritizing power availability, rather than selecting markets based on location, connectivity, water and land pricing.

Figure 1: H1 2023 Wholesale Primary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H1 2023 and H1 2022.
**Rental rates are quoted asking rates for 250 – 500 kW at N+1/Tier III requirements.
Source: CBRE Research, CBRE Data Center Solutions, H1 2023

Figure 2: H1 2023 Wholesale Secondary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H1 2023 and H1 2022.
**Rental rates are quoted asking rates for 250 – 500 kW at N+1/Tier III requirements.
Source: CBRE Research, CBRE Data Center Solutions, H1 2023.

National Lease Pricing

  • Limited supply and strong demand continued driving up asking rates in H1 2023. The average asking price across primary wholesale colocation markets for a 250- to 500-kW requirement increased by 7.2% in H1 2023 to $147.81 per kW/month.
  • Supply constraints and strong demand will lead to further price increases in 2023.
  • Occupiers will be evaluating their on-premises workloads and cloud spends, given power costs volatility along with rental rate increases.
  • Operators are more willing to lower lease pricing for legacy assets with vacancy. Generally, there is a material pricing difference between a new-build facility and a legacy data center.
  • Lack of readily available power and extended lead times for key pieces of infrastructure such as generators are delaying construction timelines by 24 to 48 months. The constrained supply environment continues to support a floor in pricing.

Figure 3: 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.
Source: CBRE Research, CBRE Data Center Solutions, H1 2023.

Capital Markets Insights

  • Market fundamentals such as increased tenant demand, low vacancy, positive rental growth and overall data center asset class performance continue to attract new capital sources.
  • There is sustained investor interest across the risk spectrum. New development, select value-add and core-plus offerings remain attractive despite global economic headwinds and lending volatility.
  • There are ample debt financing options across real estate lenders, infrastructure funds, project finance, TMT lenders and others.
  • Several recapitalizations were completed in H1 2023, with more pending in H2.
  • There is continued interest in carrier hotels in both primary and secondary markets.

Notable H1 2023 Investment Activity

  • GI Partners acquired an Ashburn, VA data center for $151 million from a Starwood and Digital Realty joint venture.
  • Digital Realty sold a $150 million data center in Texas.
  • KDDI announced its $1 billion acquisition of Allied Properties’ data center portfolio.
  • Manulife Investment Management plans to acquire a controlling interest in Serverfarm.
  • Brookfield Infrastructure Partners, alongside existing investor Ontario Teachers’ Pension Plan, plans to acquire Compass Data Centers for a reported $5.7 billion.

Figure 4: Inventory Growth of Primary Data Center Markets since 2020

Source: CBRE Research, CBRE Data Center Solutions, H1 2023.

Valuation Insights

There was limited transactional data in H1 2023. Investors remain focused on top-tier data centers with strong credit tenancy, significant remaining lease terms and ability to meet customer demand for the right connectivity, cloud on-ramps and density. In-market supply and demand trends continue to impact rental rates, with fewer operator leasing concessions affecting underwriting assumptions. Although the increased cost of debt has put upward pressure on cap rates, market-level supply and demand dynamics are driving unprecedented rent growth. Operators are eager to end leases in power-constrained markets so they can re-lease at higher prices. Increased market rent dynamics pressure cap rates down and create opportunity for non-stabilized assets with contracts below the current market rate. As a result, landlords are eager to take back space and power in supply constrained markets due to favorable re-leasing spreads. Assets with assumable debt present an attractive solution to the current financing environment.

Lending activity persists for projects under construction, especially preleased and stabilized assets where developers and operators have committed to completion schedules to meet promised lease commencement dates. Data center providers and customers continue acquiring land in strategic markets, with lack of suitable sites causing bidding wars for offerings that meet established power and fiber profiles.

Vacant and second-generation enterprise data center acquisitions remain increasingly difficult to underwrite. Physical characteristics and market fundamentals at the time of sale are increasingly more important, especially considering speed-to-market and power availability. Enterprise facilities built for a specific use, with limited consideration for their second-generation market appeal, are often trading at a significant discounts to replacement costs. Assets with critical environments that support modern customer densities or possess a fiber-rich network topology can limit the discount to replacement cost.

Figure 5: Primary Markets Historic Net Absorption, Preleasing & Under Construction

Source: CBRE Research, CBRE Data Center Solutions, H1 2023.

Network Insights

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AI usage and identification of new use cases grew tremendously in H1 2023. Notably, ChatGPT surpassed 100 million users at record speed. The broader digital infrastructure industry is also buzzing about AI. It is revolutionizing network requirements, performance capabilities and new enterprise use cases such as predictive analytics. This will sharply increase network infrastructure demand, which is critical for transporting high data volumes between locations and interconnection systems. For example, inputting basic text into AI tools can generate graphics, images and video content, producing considerably larger data outputs than inputs.

Implications for Networks

  • Expanding data volumes will necessitate the construction and implementation of more fiber network infrastructure. As developers get more interested in rural areas for AI training projects, new “last-mile” fiber connections will be key. AI systems risk performance or capacity issues without sufficient network infrastructure. Traditional network architectures will continue to be replaced by ultra-high capacity, low-latency, flatter and more resilient designs–each requiring deep-fiber-based components.
  • Edge data centers will also play an important role in the AI ecosystem. Edge computing reduces latency and enables 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.
  • 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 significant network bandwidth than what currently exists. These systems can slow traffic and create bottlenecks if not properly addressed.
  • AI will continue reshaping internet use and network traffic patterns. The large data exchanges required for AI training can cause increased and potentially disruptive traffic flows. As evidenced by the spike in data use during the pandemic’s peak, changes to how and where information is accessed can have significant implications on network traffic patterns.

Figure 6: Total Inventory vs. Under Construction by Primary Market, H1 2023

Source: CBRE Research, CBRE Data Center Solutions, H1 2023.

Figure 7: Total Inventory vs. Under Construction by Secondary Market, H1 2023

Source: CBRE Research, CBRE Data Center Solutions, H1 2023.

Data Center Outlook

  • Power availability and capacity will remain top issues for developers and operators in 2023. Critical priorities include locating power, determining available volume and controlling its cost.
  • Lead times for procuring electrical switchgear and raw building materials are still high compared to pre-pandemic levels. Data center operators have not obtained necessary parts on time, causing operational outages.
  • Demand will stay resilient in the face of macroeconomic uncertainty, with AI providing tailwinds for leasing in H2 2023 and beyond.
  • The federal funds rate is expected to stay elevated but stable for the rest of 2023.
  • Regulators and government officials will continue monitoring utility transmission and distribution issues, along with longer wait times for pending renewable projects to connect to the grid.
  • Increased costs of construction, building materials and labor will prevent supply from oversaturating the market.
  • Pricing is expected to continue rising in H2 2023 due to supply constraints and lack of available power, limiting fast-track development timelines.
  • U.S. data center operators will have the major challenge of decreasing Scope 1, 2 and 3 emissions for carbon reduction mandates while also overcoming supply chain delays and power shortages. We expect operators to expand in markets with the most renewable power availability, such as Texas, Central Washington, Montreal, Quebec, Des Moines, Iowa and Umatilla, Oregon.
  • Reno, Nevada’s and Charlotte, North Carolina’s power availability will also continue attracting development.

Trends to Watch

  1. The U.S. Bureau of Labor Statistics reported electricity prices were up 10.2% year-over-year, from March 2022 to March 2023. Will this trend continue into 2024?
  2. Wind and solar projects have been growing exponentially due to power generation shortages in major markets. What transmission and distribution innovations and solutions will we see from utility companies and operators?
  3. AI achieved mainstream popularity from ChatGPT in H1 2023. Will rural markets with low land prices and available power continue drawing developers’ attention for AI training?
  4. 65% of application workloads will be optimal or ready for cloud delivery by 2027, up from 45% in 2022, according to Gartner. How will this shift hyperscaler development to new and emerging markets?
  5. As network coverage continues to transition from 4G to 5G, what types of Business-to-Enterprise applications will we see companies use to leverage mobile edge compute?
  6. Will AI become the next major wave of data center growth, unlocking newfound efficiencies, cost-savings and innovative solutions? How will legacy data center operators innovate and adapt, to provide infrastructure that supports AI workloads?
  7. Gartner predicts 15% of on-premises production workloads will run in containers by 2026, up from less than 5% in 2022. Modular data centers have been in development for years. Will macro cell tower companies deploy these solutions at cell site base stations at scale?
  8. How will the Fed’s unprecedented rate-hiking cycle impact digital infrastructure assets?
  9. Will rental rate pricing be impacted by businesses’ continuing to shift budget in preparation for a potential economic slowdown?
  10. Nuclear power can be generated in high concentrations using less physical space, and it has low carbon emissions. Is nuclear power the best solution for energy supply generation in North America?

Market Buzz

Aerial view of Austin at dawn

Within the “Texas Triangle,” Austin has emerged as one of North America’s fastest-growing data center markets. Hutto, Pflugerville, Round Rock and Taylor in North Austin have seen impressive activity over the past five years. Samsung has a semiconductor fabrication campus in Taylor, the largest foreign investment in Texas history, and Dell’s headquarters is in Round Rock.

City skyscrapers

Hyperscaler demand will keep increasing due to the market’s impressive power capacity, availability and affordable land. Charlotte has strong connectivity along the East Coast, given its location between Northern Virginia and Atlanta. Nearby Myrtle Beach’s subsea cables to Europe and Latin America are expected to be completed in 2023 to 2024.

Aerial view of city in front of mountains
Salt Lake City

There has been significant data center growth over the last decade. Telecommunications companies built tremendous fiber infrastructure alongside the historic transcontinental railroad system running through and near Salt Lake City. Other regional tailwinds include low natural disaster risk, low power costs, sales and use tax exemptions and a high-skilled workforce.

Crop field in front of mountains

An emerging market along the Columbia River in northeastern Oregon, Umatilla has drawn tremendous interest from hyperscalers due to low land prices, available power and low natural disaster risk. A major beneficiary of local hydropower, questions regarding connectivity remain. Will fiber providers enter the market at the blistering pace seen in Central Washington?

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