U.S. Data Center Leasing Reaches Record Levels in 2018

CBRE, Data Center Leasing, Virginia, Phoenix, Dallas, Texas, Silicon Valley, Chicago, Atlanta, New York, Boston, Denver, Austin, Minneapolis, Houston, Seattle, Charlotte

By Meghan Hall

As consumers, the world has become accustomed to receiving information instantaneously, and people are rarely caught without their phones or mobile devices. As our reliance on technology has grown, so have hyperscale cloud providers. That growth reached a new level in 2018, according to CBRE’s recently released North America Data Center Trends Report, which states that hyperscale cloud providers recorded a record 303 megawatts (MW) of absorption across the seven primary U.S. data center markets in 2018, a 16 percent increase year-over-year.

In its report, CBRE evaluated seven primary markets: Northern Virginia, Phoenix, Ariz., Dallas-Ft. Worth, Texas, Silicon Valley, Calif., Chicago, Atlanta, and New York’s Tri-State area. It also studied eight of the top secondary markets, which included Southern California, Boston, Mass., Denver, Colo., Austin-San Antonio, Texas, Minneapolis, Minn., Houston, Seattle and Charlotte-Raleigh, N.C.

In all of these metros, strong demand for data and technology capacity fueled data center market growth. According to CBRE, global data center and cloud IP traffic are expected to triple by 2021 at a compound annual growth rate (CAGR) of 25 percent. Data consumption driven by big-data analytics, 5G, gaming and streaming services will only serve to positively impact wholesale data centers.

Overall, the primary markets added 322 MW of new capacity in 2018 and had a construction pipeline of more than 500 MW. Northern Virginia accounts for the vast majority of the national data center market, accounting for 67 percent of construction activity and 58 percent of net absorption in 2018. However, the six remaining markets, including Silicon Valley, are growing. In 2018, Silicon Valley had 255.6 MW of inventory, 31.6 MWs from 2017. Aside from Northern Virginia, the region also has the lowest vacancy rate of all major markets, at seven percent, making it the second-most supply constrained market in the United States. The national average, comparatively, is 11 percent.

“Silicon Valley. It’s all about access to the cluster of technology companies that then make up a large portion of the data center customer base in this market as well as the aggregation of transatlantic and U.S.-based network providers and public cloud operators,” explained Jennie Karnes, vice president at CBRE. “As venture capital funding continues to flow in to the market to foster growth in the technology sector, data center demand continues to grow.”

According to the report, very few large blocks of capacity are available within the Silicon Valley market, with only 14.5 MW under construction at the end of 2018. 25 MW of capacity was absorbed in 2018, while 32 MW was added, and operators including CyrusOne, Digital Realty and EdgeCore are all currently investing in land for data center development throughout Silicon Valley, as the region’s proximity to major tech companies, top-talent and investment drive interest from both domestic and international data center operators.

“Customer demand and the hybrid IT ecosystem that it has created are the primary drivers of growth,” said Karnes. “Silicon Valley has the highest concentration of engineering talent in the United States – multi-national companies want access to this talent pool, while regional companies will always want to keep a presence in the Bay Area within close proximity to headquarters and local resources. As a company’s infrastructure strategy matures, the need for physical infrastructure and access to network and public cloud providers at the same location or within the same market becomes critical. Therefore, low latency access to global network providers and public cloud operators also drive growth of data centers in this market.”

However, acquisition and land costs within the Bay Area are making it increasingly difficult for providers to develop large amounts of space. According to Karnes, this can be a limiting factor for many companies who can lease 20 MW or more at a time. While providers have announced more than 140 MW of additional capacity in the coming years through additional supply and facility expansions, it could be some time before pressure on the market eases up.

The Seattle data center market is also growing, CBRE reports. In 2018, absorption totaled 2.9 MW in 2018 and wholesale vacancy decreased down to 15.3 percent. And, as the second-largest tech employment market in the country, the Puget Sound — and inland Washington — is well-poised for growth.

“…On the West Coast, inland Washington stands out as a leading low-cost location for large data center tenants,” said Jane Blaire, first vice president in CBRE’s Seattle office. “The small towns of Quincy, and East Wenatchee have become global data center powerhouses because they offer cheap power, an excellent climate for free outside-air-economizer cooling, limited weather and geographic risks, economic incentives (no sales tax on personal property), trained data center employees, and importantly, ample availability of green hydropower.”

Growth in emerging markets such as Seattle will be much more moderate than in primary markets such as Silicon Valley, but notable investment activity, such as Clarion’s sale of a Seattle-area data center to Chicago-based IPI Data Center Partners for $53.5 million at the end of 2018, signaling interest in the Puget Sound market.

“We will see record demand over the next few years as the amount of data continues to grow, creating demand for compute and storage,” said Karnes of the outlook for not just Silicon Valley, but the national data center market at large. “The global race to further develop and adopt artificial intelligence, self-driving cars, technology and the Internet of Things will continue to drive data center demand.”

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