As the pandemic disrupted life around the globe, nearly everyone’s routine changed, including the way we communicate with one another and how we send and receive data.

With an abrupt shift in the way we work, and a dramatic increase of data traffic traversing the internet, it became apparent that the current infrastructure was not built to handle the future demand that a dispersed workforce will generate, or the impacts of rapidly increasing data consumption from the entertainment industry and data streaming.

Employees logged on from their new home offices, more virtual meetings were held (20x more meetings according to Zoom’s usage statistics), and content providers saw an uptick in demand by their customers quarantining at home streaming movies, video games, and anything else to help pass the time.

The current state of the workforce, and the changes to society’s relationship with digital technology clearly positioned the data center and the telecom industries to benefit. As a result, bullish investor sentiment has led to a recent flood of capital and new investors to the space. Investment firms around the globe are seeing the resilience and critical role that data centers play and trying to capitalize on its projected growth. Technology REITs have shown strong performances, with Data Center REITS (EQIX, DLR, CONE, QTS, and CORE) up roughly 30% year-to-date. Furthermore, private equity investment has continued to grow, with the most recent example being DataBank’s announced acquisition of zColo.

This is reflective of the confidence surrounding data center growth potential. Some investor forecasts have data center spending from end-users expected to hit $200 billion by 2021. As technology REITs continue to outperform other commercial real estate asset classes, many large investment firms traditionally involved with office investments are pivoting to be well-positioned in the space, including a recent announcement by a large global investment bank to invest $500M in data centers.

While wholesale leasing activity in the first half of the year grew sharply at colocation facilities during the early stages of Covid-19—primarily driven by large hyperscalers, cloud companies and large content providers—leasing velocity in the third quarter slowed down across many secondary markets compared to the previous few months. These hyperscale companies still appear to be the busiest in primary markets, with absorption numbers primarily reflecting the activity of one or two cloud giants. Northern Virginia’s absorption topped 85.8 MW, driven largely in part by cloud service providers.

As budgets begin to thaw after a 6-month COVID-induced pause, enterprise clients are diligently working to modify their long-term IT strategy, whether this means more colocation deployments, cloud dependencies or hybrid IT restructuring. This activity is anticipated to spin upwards in the coming months.

Much of the chatter among industry professionals indicates a strong likelihood that a number of key enterprise deals will close in the fourth quarter and that additional activity will pour into the first quarter of 2021. Competition in the market, availability of options for tenants, and lower return expectations from investors are leading to continued price compression, which continues to be predicated on specific market supply and demand dynamics. Tenants won’t see the same leasing discounts doled out across the board as not all data center assets are created equal. On average, asking rates at high-quality facilities with strong network connectivity and proximity to cloud on-ramps remain stable.

The Dallas, TX, data center market was a bit of an outlier with respect to enterprise leasing for Q3 with 11.2 MW of absorption in total - the bulk of which was taken up by enterprise clients. This isn’t surprising as Dallas is largely an enterprise market, with 90%+ of the activity in the market being Fortune-1000 users and not driven by the major hyperscale players taking colocation space. The large hyperscale companies still showed most of the activity across many markets, with one large cloud technology giant absorbing space in nearly every market, including a small amount of power taken up in Dallas.

Providers across the industry are trying to identify whether select hyperscalers will continue to build and operate their own facilities, or if they’ll continue to take up space with colocation providers. The reality is that they’re doing both. The lion’s share of the leasing activity at colocation facilities in the third quarter across the primary and secondary U.S. markets has been hyperscalers’ speed to market to diversify their presence globally to better support their cloud businesses and the growing number of clients moving to a hybrid IT model.

When working with providers developing new colocation facilities, these large hyperscale companies are often getting their feet in the door early with expansion options and rights for first refusal. Some markets with proximity to major metros have seen supply constraints due to limited infield space that would be well-suited for data center development being prioritized for e-commerce distribution use.

Although some of the COVID-19 disruption may level out over the next 12-24 months, there will still be a heightened need to send and receive data, ensuring growth and investor interest in this budding real estate sector.

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