Richard Berger | Globest
Strong demand that is exceeding supply increases has pushed rates in North American data center markets to close to their peak highs of the 2010-2011 period, according to a new report from CBRE.
Occupiers now typically pre-lease space 18 to 36 months in advance, markedly earlier than the six-to-12 months that was previously the norm.
In markets such as Silicon Valley (up 54%), Northern Virginia (47.5%), Chicago (47%), Dallas-Fort Worth (29%), and Phoenix (20%), average asking rental rates increased by 20% to 54% over the past eight months.
New capital sources and investment were projected to push down rental rates, CBRE said.
“However, power constraints are delaying new construction and are the biggest impediment to expanded data center supply, which has caused leasing competition for existing data centers to intensify and rents to remain elevated,” according to the report.
An all-time high of 3,077.8 MW is under construction in primary markets, up 46% since H1 2023.
Vacancy rates have fallen since 2021 despite booming construction. In H2 2023, vacancy hit record lows in New York Tri-State, Seattle, Central Washington, and Chicago.
Rates are rising for all sizes of requirements, Andy Cvengros, Managing Director, Data Center Markets, JLL, tells GlobeSt.com, but have increased fastest over the past three years for mid-sized (1-10MW) requirements, especially as large hyperscalers have absorbed nearly all large blocks of space in the focus markets nationally.
“Pricing for available capacity within the next 12 months has increased even faster, as most markets are running into no vacancy situations,” Cvengros says. “It is difficult to predict how rising rental rates will impact users given their insatiable demand for capacity and limited supply.”
Given the rise of DC requirements spilling over into secondary markets, it is likely that there will be a continuing cycle of rent growth in secondary and tertiary markets as well, Lisa DeNight, National Industrial Research Managing Director at Newmark, tells GlobeSt.com.
“Negotiating power is squarely in landlord favor due to ultra-low availability across the board,” she said. “Tenants can and will pay. Top global hyperscalers – major absorbers of data center space – represent some of the largest market caps in the world and are demonstrating a forecasted average of 25% increase in capital expenditure budgets this year.”
Howard Berry, Principal, National Data Center Solutions, Avison Young, tells GlobeSt.com that as of recent trends, data center asking rents have been steadily increasing due to the rising demand for data storage and processing capabilities.
“With vacancies and older outdated data centers sitting on the market for years, being scooped up by AI operators, tenants are not left with many options,” Berry said.
“This trend is impacting the data center industry by driving landlords to capitalize on the growing market, while tenants are facing higher costs for data center leasing, potentially impacting their overall operational expenses.”
Heather Wyckoff, a partner at Schulte Roth & Zabel tells GlobeSt.com that she’s seeing an increasing interest among managers in setting up funds that invest exclusively in data centers, in what is a relatively new asset class for real estate funds to focus on.
“We expect fundraising devoted to this sector to grow significantly,” she said.
