As the world becomes increasingly digital and the demand for e-commerce continues to grow, data centers are becoming a significant segment of industrial real estate. According to a monthly industrial report by Commercial Edge, the segment continues to outperform, with an average sales price of $319 per square foot, approximately 195 percent higher than the $108 per-square-foot average sales price of industrial property overall.
The growing interest in data centers continues to be heightened by the demand for e-commerce, which has only increased throughout the COVID-19 pandemic. According to CommercialEdge, the second quarter of the year saw $222.5 billion in e-commerce sales, an overall 3.3 percent increase from the first quarter of 2021.
“One of the reasons is because of the tremendous amount of information that’s growing exponentially. It has to be handled and maintained, not only from a cybersecurity standpoint but from a volume standpoint. We see that all industries are contributing to that,” said Doug Ressler, office manager with Yardi Matrix, Commercial Edge’s sister site. “From a cost standpoint, many times it’s a cost benefit to be able to outsource to the data centers…we see that as a lucrative type of business right now.”
According to CommercialEdge, data center inventory is primarily located in just seven markets, which includes Washington D.C., Dallas–Fort Worth, Chicago, the San Francisco Bay Area, New Jersey, Phoenix and Atlanta. However, the data center segment could continue to grow should the proposed Infrastructure Investment and Jobs Act become a law. According to the report, the proposal would have a massive impact on data center demand as it would allocate $65 billion to increase the number of broadband users nationwide. Primarily, the bill would connect the 23 percent of Americans who do not have access to broadband, potentially opening new markets for data centers.
“The majority of the speculation is it would be a good thing…We see it as a really broad-brush approach – and so does Congress – that says this would be advantageous in incentivizing the economy to gain additional traction and to develop more from those monies,” Ressler said.
In general, e-commerce has caused a dramatic surge in the demand for industrial space. According to Commercial Edge, U.S. average rents for industrial rates grew to $6.31 per square foot this month while national vacancy declined to 5.8 percent. At the same time, Commercial Edge reported $30 billion in total sales closed since the beginning of the year.
According to the report, port markets, particularly those in Southern California, saw the fastest increase in average rental rates. Rental rates in the Inland Empire, which averaged $6.36 per square foot, grew the fastest with a 6.9 percent increase while Los Angeles followed closely behind at 6.4 percent. However, Los Angeles reported the highest rental rate in the region at $10.13 per square foot, according to the report.
At the same time, the Inland Empire reported the lowest vacancy rate at 1.4 percent, due to growing demand and the lack of developable land. In comparison, the highest vacancy rate was reported in Houston at 11.6 percent.
Southern California continued to lead the way in sales activity as well. According to the report, Los Angeles remains the market with the highest sales volume, surpassing $2 billion since the beginning of the year. Orange County, however, recorded the highest average sale price at $312 per square foot. Both Seattle and San Francisco followed closely behind, with both markets topping $1 billion in total industrial sales this year.
While industrial space continues to be in high demand, CommercialEdge reported 500 million square feet of new inventory under construction nationwide since the beginning of August. According to Ressler, the need for additional industrial supply will likely continue to increase as the interest in technology and e-commerce continues to grow.
“I think what we’ll see is a tremendous surge that will last for quite a significant time in terms of the industrial market and things that it will require, especially as we modify the supply chain to continue to meet consumer demand,” Ressler said.