It was a blockbuster year for the data center industry in 2020, as customers leased a record of nearly 700 megawatts of IT capacity from multi-tenant service providers, according to a new report.
That total was more than twice the previous record from 2018, as the COVID-19 pandemic created extraordinary demand for data center space as the world shifted to digital operations for work, school and play. The report was the latest in a series of year-end updates on the wholesale data center from North American Data Centers.
Although the leasing volume was enormous, it was also focused, with more than 500 megawatts (MWs) of absorption in Northern Virginia, home to the world’s largest concentration of cloud computing infrastructure. The Northern Virginia market represented more than 70 percent of the leasing in North America in 2020, compared to 50 to 55 percent in recent years.
The deals were larger than ever, with five leases in excess of 50 megawatts, and 19 deals of 10 MWs or more. That’s a huge departure from just five years ago, when a lease larger than 10 MWs was unusual.
Those huge deals were concentrated in a small number of customers, according to Jim Kerrigan, the principal of North American Data Centers, who has been tracking data center leasing since 1998.
“There’s three tenants that made up most of that space,” said Kerrigan. “The strong leasing activity during the second quarter stemmed from hyperscale companies, as many of these tenants pulled forward their requirements as a result of the distributed workforce and the work-from-home lifestyle.”
Three Customers Drive Huge Deals
The busiest company was Microsoft, which leased a massive 225 megawatts of capacity in nine leasing deals across four markets – Northern Virginia (146 MWs), Chicago (39 MWs), Silicon Valley (34 MWs) and Phoenix (6 MWs). That reflects strong demand for the Microsoft Azure cloud computing platform, which had a 48 percent growth rate in its most recent quarter.
Microsoft has been one of the largest customers for multi-tenant data centers in recent years, leasing large volumes of wholesale data center capacity in which a tenant leases a finished suite of “turn-key” raised-floor space.
“With Microsoft, it’s hard to know whether they are going to lease or build their own,” said Kerrigan, who noted that in 2020 Microsoft stepped up its leasing even in markets where it is also building new data center campuses
The other big customer in 2020 was Bytedance, the Chine-based parent of the TikTok video service. ByteDance leased 134 megawatts of space in “Data Center Alley” in Ashburn, Virginia. According to North American Data Centers, that included large leases with Digital Realty, Aligned and Vantage Data Centers. Another gig player in the leasing market was Facebook, which reportedly had several large leases in Virginia.
- Oracle added capacity with multiple leases in both Ashburn and Phoenix.
- Uber added space in Ashburn, Atlanta and Hillsboro, Oregon.
- Workday signed a substantial lease in Ashburn.
- Twitter boosted its capacity in Atlanta and Hillsboro.
- Rackspace signed a substantial deal in Manassas, a growing data hub in Prince William County in Northern Virginia.
- Chipmaker NVIDIA, the LinkedIn social network, and financial services company Citadel were also meaningful customers for data center providers in 2020, the report said.
The enormous demand for data center space quickly absorbed the available inventory in several leading markets, prompting new construction to meet existing demand. This has created backlogs, as large customers pre-lease new data centers before they are built.
Big Gains for New Providers
Kerrigan noted that a wide range of developers were able to land major deals, including several privately-held providers that have entered the market in the last five years. These newer players like Aligned, CloudHQ and STACK Infrastructure have the funding and experienced teams to compete with publicly-held data center REITs for major deals.
Here’s a look at some of the highlights of the North American Data Centers report on the landlord side of the equation:
- It was a big year for Digital Realty, which had 10 wholesale leases ranging of 2 MWs or more (including a 52 MW lease) and also did two deals to develop entire buildings as “powered base” facilities for data center development.
- It was perhaps the strongest year yet for hyperscale business at QTS Data Centers, which recorded 12 deals of at 2 megawatts or more, with these large deals totaling 70.5 MWs spread across five markets – Atlanta, Northern Virginia, Chicago, Hillsboro, and Richmond.
- STACK, which launched its data center platform in early 2019, leased 50 MWs of space in deals in San Jose and Suburban Chicago.
- Iron Mountain continues to exceed its leasing goals, adding 28 MWs via multi-megawatt across its U.S. campuses in Manassas and Phoenix, plus a 27 MW deal in Frankfurt.
- Vantage Data Centers and NTT Global Data Centers (RagingWire) were among the other privately-held suppliers.
- It was a down year for CyrusOne, a public data center REIT which has won many large wholesale deals in recent years, but had just two leases on the list, totaling 29 MWs.
Kerrigan noted that investors are becoming comfortable with shorter-term leases, as most of the publicly-traded data center REITs report a 7.25-year average term length. Many of the largest leases were 10-year deals, he said.
New Momentum for Chicago
In terms of geographic markets, Northern Virginia was the dominant story, but Kerrigan also noted a resurgence of the Greater Chicago market after several years of subdued leasing. The bounce is likely s response to state of Illinois’ 2019 passage of tax incentives for data center construction projects. There was 47.5 MWs of multi-megawatt wholesale deals and a 192,000 SF powered base deal in the Greater Chicago market, which includes sub-markets in Downtown Chicago and the Suburban Chicago market near O’Hare Airport.
“Chicago is the most interesting market,” said Kerrigan. “Chicago had its strongest year during the past three years with more than 45 MWs leased by Microsoft.”
It was an unusually quiet year for large deals in the Dallas market, according to North American Data Centers, despite an ample supply of wholesale data center space due to recent construction projects.
While the pandemic boosted demand from hyperscale operators, it was a different story for the enterprise IT sector. “Much of the enterprise’s leasing took place in the first quarter, before the pandemic slowed down its leasing,” said Kerrigan. “Expect the leasing activity for those users to pick up during 2021, after we overcome the logistics of acquiring new sites.”