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Investment in the U.S. data center sector reached record levels in the first half of 2017, according to a new report from CBRE. H1 2017 investment totaled $18.2 billion, already more than double that for all of 2016 (inclusive of all single asset, portfolio and entity-level/M&A transactions). At this pace, investment in the data center sector is on track to surpass the total for the three previous years combined.
“Over the past five years, more than $45 billion of investment capital has flowed into the data center sector, with more than 50 percent of that total occurring since the start of 2016,” says Pat Lynch, senior managing director with CBRE. “The robust adoption of rapidly evolving, data-intensive technology continues on a strong upward trajectory and will drive growth in the data center sector going forward.”
Top U.S. Data Center Markets
The U.S.’s seven major data center markets—Atlanta, Chicago, Dallas/Ft. Worth, New York Tri-State Region, Northern Virginia, Phoenix and Silicon Valley—combined saw nearly 88 megawatts (MW) of positive occupancy gains in the first half of 2017.
Northern Virginia in particular remains a strong outperformer, with net absorption totaling nearly 42 MW in H1 2017. Northern Virginia is the largest and most active data center market in the world, with its wholesale inventory larger than that of any country in Europe or Asia Pacific.
Leasing Activity
Following a substantial run of multi-MW leases that contributed to record-levels of net multi-tenant data center absorption in each of the past two years, hyperscale Cloud Service Providers (CSP) were largely on the sidelines in the first half of 2017. New leases in H1 2017 were largely by enterprise users with requirements between 500 kilowatts (kW) to 1 MW.
“With the bulk of CSP-related activity occurring as pre-leasing in new data center projects, it’s not surprising that hyperscale users are temporarily focused on building out and deploying their cloud infrastructure,” said Jeff West, director of data center research, CBRE. “Demand from enterprise users will continue this year as they execute their slow-and-steady migration of IT workloads to cloud and third-party facilities. Meanwhile, all indicators are that requirements from hyperscale CSP users will substantially return.”
Major markets are still favored by both hyperscale CSPs and enterprise users, as well as third-party data center operators—a trend that shows no signs of slowing in the near term. Proximity and access to cloud services, as well as to latency-sensitive interconnection nodes to existing networks, are still the strongest drivers of retail/colocation requirements.
Construction Pipeline
The data center supply pipeline continues to accelerate with nearly 284 MW of wholesale capacity currently under construction in the primary data center markets—and 46 percent of that space already pre-leased (131 MW). While pre-leasing levels have consistently been in 45 percent-to-65 percent range over the past several years, there has been a shift in the past several quarters towards speculative development as a result of sustained demand for data center services.
“In particular, hyperscale CSPs are more openly sharing their expansion goals with data center providers to encourage speculative development, as speed-to-market is often a critical factor driving these deployments,” Lynch says.
Northern Virginia remains the most active development market, with more than 10 new projects (119 MW of wholesale capacity) in the pipeline as of the end of H1 2017. Other markets with significant construction activity include Dallas/Ft. Worth (47 MW), Chicago (41 MW), Silicon Valley (30 MW) and Phoenix (28 MW).
