Recent industry analysis under the byline of Jacob Albers, Cushman & Wakefield's Head of Alternatives Insights, suggests that while energy prices can and do impact the data center market, lease rates for both hyperscale and wholesale data center space are also being affected by rising inflation.
This contention is premised on the global commercial real estate services firm's assessment of just how much data center development has grown across the U.S. in recent times - jumping an amazing 138.9% over the past five years, from 3.6 GW in 2018 to at least 8.6 GW in 2023.
In an online brief posted on July 26, Albers and co-author Matthew Nevinger, Research Director of Cushman & Wakefield's Kansas City operation, state that the six key markets of Northern Virginia, Silicon Valley, Phoenix, Atlanta, Chicago and Dallas accounted for 72% of that development in 2022.
As consistently critical factors in the plans of both data center operators and tenants, the authors note how since the pandemic, both power and lease rates have shifted dramatically.
In addition to probing the inflationary question, the analysts' brief seeks to determine how these rates have changed over the timeframe and whether there is a connection between the two, while forecasting the sector outlook vis a vis this relationship.
Ballooning energy costs make for pricing roller coaster
The brief observes how all six major data center markets saw a sharp rise in power costs from May through August of 2022, before retreating later that fall.
As tumultuous global energy markets and local power availability affected the region's Lithia Springs data center cluster, Cushman & Wakefield analysis found that Atlanta experienced the greatest pricing increase, up to $0.147 per kWh in June of 2022.
The brief states that September 2022 saw power pricing beginning to moderate across major markets, notwithstanding some horizontal differences in just how much rates decreased.
Central to the analysts' contention regarding the effect of rising inflation is how, in January 2022, the core consumer price index (CPI) for all urban consumers was seen to surpass 6% - quickly impacting the energy market.
The brief states that by March, every market except for Silicon Valley showed a YoY increase of at least 11% in the cost of electricity.
The analysts recall how local private utilities near the Santa Clara data center cluster made Silicon Valley a unique market that experienced less drastic increases in pricing, compared to larger utility providers in the greater San Francisco Bay Area, which saw reported pricing increases of 19% YoY.
Meanwhile in the Phoenix market, price increases throughout the rest of the year were assessed as moderate - but from April through September, the monthly average for YoY increase in price was seen to rise above 35%.
Hyperscale lease rates climb along with energy prices
In analyzing how lease rates changed over the same time period, the brief states that the largest YoY increase for hyperscale lease rates - over 4 MWh - came in Silicon Valley, where the average rate leapt 45.3%, from $106 per kilowatt per month in 2021 to $154 in 2022.
The brief emphasizes that despite the increasing cost of the Silicon Valley market, interest from a plurality of users has increased due to HPC opportunities associated with the boom in AI there.
The second-highest reported jump in lease rates came in Northern Virginia, climbing 30.1% higher than the previous year, a percentage exacerbated by limited supply in a market with a vacancy of approximately 1%.
Meanwhile Dallas, previously assessed with some of the lowest lease rates among the top six markets, has started to see pricing in line with the others, according to Cushman & Wakefield data.
As further reported by the brief, Phoenix and Chicago saw respective increases of 12.9% and 12.2%.
Notably for its part, though it had the largest increase in power costs, according to Cushman & Wakefield, Atlanta recorded the smallest increase in hyperscale lease rates, at only 2.9%.
Despite experiencing volatility due to power costs, the brief adds that Atlanta was the most stable market in terms of lease rates for both hyperscale and wholesale data center space.
Early 2023 power costs inflate hyperscale lease rates
Cushman & Wakefield's analysis further finds lease rates in the overall hyperscale market being driven not only by energy prices, but also by the performance of lease rates and power costs in the early part of 2023.
While asking rates in Atlanta remained flat, the brief reveals that every other market saw an increase of 4.5% to 6.5% during the first few months of the year. The analysis states that the concurrent increase in power costs on a YoY basis in those markets has ranged from 3.4% to 59.6%.
Finally, Cushman & Wakefield notes that hyperscale lease rates in Phoenix and Chicago "have moved in close with one another," up 12.9% and 12.2% in 2022, and up 4.8% and 4.5% in early 2023.
As symbiotically reckoned by Albers and Nevinger, "Chicago and Phoenix have seen the most similar trends, with the cost per kilowatt per month leasing rates within $2 to $5 from 2019 through the early part of 2023 - despite a noticeably higher increase in electricity costs in Chicago."
Wholesale leasing rate contraction touched all markets - until it didn't
Noting that lease rates for wholesale data center space provide more historical data, Cushman & Wakefield's analysis found that the trend from 2017 through 2020 was a contraction of rates across all six markets.
The brief states that this trend was most notable in Northern Virginia, where pricing decreased 28%, dropping from $143 kW per month in 2017 to $103 in 2020.
As further reckoned by Albers and Nevinger, "From that point on, the markets took divergent paths. Northern Virginia, Phoenix and Chicago saw lower wholesale lease rates in 2021 than they had in 2020, while rates were unchanged in Atlanta and saw a small rise in Silicon Valley."
The analysts found the difference in the markets became even more pronounced in 2022, as Atlanta and Chicago saw the wholesale data center only slightly change - whereas other markets saw a substantial increase.
To wit, according to the brief, Phoenix saw wholesale leasing rates rise by 19.5%, while both Northern Virginia and Silicon Valley experienced increases of over 30%.
Cushman & Wakefield adds that the first several months of 2023 saw wholesale rates rise in all six markets. Through early 2023, the analysis states that the aforementioned locations dominated the data center market.
As postulated by the brief, "Given the large head start these markets already have, it is unlikely any of them will be displaced soon as the primary North American data center markets. But demand for data center space means additional development will be needed, and many more markets have growing pipelines of data centers that range from edge to hyperscale sizing."
Cushman & Wakefield reckons that lower costs will be important when deciding where these projects are located - although, as the brief concludes, "other factors, including geographic location, availability of land, zoning ordinances, regulatory issues and construction costs will need to be considered as well."
To view detailed charts of the data, check out the full brief on Cushman & Wakefield's website.
