For data center industry watchers, there's a lot that jumps out right off the bat from CBRE's new North America Data Center Trends H2 2023 report.
As with JLL's recent report of similar topic and magnitude, one has to assume that many in the data center industry must just carry these reports around, referring to them constantly, perhaps while flying around the U.S., until the next one is issued.
The new report, as composed by CBRE's Pat Lynch, Senior Managing Director; Gordon Dolven, Data Centers, U.S. Analyst; and Josh Ruttner, Associate Research Director, unfurls pleasantly on the commercial real estate services and investment company's website in easily digestible bites.
Here's our four immediate takeaways from the report.
1. Supply, Pricing, Preleasing and Vacancy Update Highlights Power Availability, Location Concerns
CBRE reported that in 2023, primary market supply grew 26% year-over-year to 5,174.1 MW. That growth notwithstanding, according to the report, limited supply and strong demand drove up asking rates in H2 2023.
The report added that colocation pricing is expected to increase by double-digits in 2024, as limited power availability and other constraints prevent available supply from expanding quickly.
As further tabulated by CBRE, the average monthly asking rate for a 250- to 500-kW requirement across primary North American data markets increased by 18.6% year-over-year, to $163.44 per kW/month.
The report noted that Northern Virginia had a 42% year-over-year price increase, the largest among primary markets.
CBRE stated that the overall vacancy rate for North American primary data center markets remains near a record low, at 3.7%.
With few relocation options, the analyst noted that most tenants are renewing existing leases rather than seeking new facilities.
The report concluded that power availability continued to influence data center operators’ location decisions more than geography did.
2. Data Center Construction Drill Down Records All-Time Highs
CBRE's analysts discerned an all-time high of 3,077.8 MW under construction in primary data center markets, for a whopping 46% year-over-year increase.
Despite power availability delays and rising construction costs, the report said that under-construction activity in primary markets is expected to reach a new all-time high of more than 2,500 MW in 2024.
Meanwhile, CBRE's analysts determined that 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.
The report confirmed that data center providers and customers continue acquiring land in both primary and secondary markets, "with lack of suitable sites causing bidding wars for offerings that meet desired power and fiber requirements," as stated by CBRE.
The report reckons that data center construction costs remain elevated due to ongoing shortages in critical materials such as generators, chillers and transformers, despite improved supply chain resilience.
Showing where data center leasing activity intersects with construction of new facilities, CBRE affirmed that preleasing activity in primary markets is strengthening, with 2,553.1 MW (83%) of the 3,077.8 MW under construction preleased.
3. CBRE In-Depth: Enshrining the Atlanta Data Center Market
Significantly, the new CBRE report said that North American data center construction increased most in Atlanta for the reporting period, growing by 211% to 732.6 MW under construction. This is perfectly in line with what we reported last fall.
CBRE's report pointed out that last year, major content providers constructed and/or financed more custom fiber networks to interconnect hyperscale facilities. The analysts said that development is continuing in primary markets, chiefly cited as including Atlanta, along with busy Dallas-Ft. Worth, and of course Northern Virginia.
(Tertiary data center markets coming in for mention in this context also included New Albany, Ohio, Huntsville, Alabama, Nashville, Tennessee and Altoona, Pennsylvania. The report highlighted how such private fiber networks provide alternative, low-latency, high-capacity pathways between hyperscale facilities.)
Notably among the report's "trends to watch," while admitting that natural gas prices remained stable in 2023 after a volatile 2022, CBRE's analysts openly wonder whether markets highly dependent on natural gas, specifically cited such as Atlanta and Dallas-Ft Worth, will continue to see appetite for additional renewable energy projects such as wind and solar.
Somewhat cryptically, the CBRE report suggests that a major hyperscaler is currently seeking 4,000 MW in the Atlanta market.
Meanwhile, as separately noted this month by the Atlanta Journal-Constitution, Microsoft just paid $6 million for 21 acres of land to expand its data center south of Atlanta.
Maybe Atlanta's data center market is getting a little too hot. Last month. DCD reported that Georgia could pause data center tax breaks over power concerns, as state lawmakers called for exemptions for facilities to be halted.
4. AI Requirements Push Further Data Center Demand
CBRE's analysis admitted that cloud providers continue to lease most available power capacity, but that artificial intelligence (AI) is also driving significant demand.
Meanwhile, CBRE expects that in the near future the largest hyperscalers’ new developments will complete construction and become operational in established, secondary and tertiary markets over the next few years, with AI requirements driving even more demand.
The report new charts how this demand increased through H2 last year, leading to significant debt financing by firms such as Blackstone/QTS, Compass and PGIM to fund new development.
Additionally, the report highlights Vantage Data Centers' significant equity infusion to support its growth, quoting DigitalBridge CEO Marc Ganzi's recent projection that AI could eventually more than double the cloud services market’s power requirements.
While noting that data center infrastructure demand keeps increasing with the global economy’s continued digitization, the CBRE report also predicts revenue from generative AI software advancements to increase at a 58% compound annual growth rate from 2023 to 2028, as reckoned by S&P Market Intelligence.
CBRE adds that this large chunk of growth is being fueled by AI’s further development across technology, healthcare, finance and other sectors.
The report points out how cloud service provider and AI company partnerships with other large U.S. companies may increasingly emerge to help bring new AI solutions to end users.
CBRE feels that this trend will lead to new edge data centers deployed on- or near-premises across various real estate asset classes, including retail, industrial, office, telecommunications towers and elsewhere.
