This week Data Center Frontier is highlighting market trend data for 2020. We begin with a look at data center leasing activity.
The societal shift to online services during the COVID-19 pandemic has made 2020 an extraordinary year for the data center industry, with record leasing and a historic boom in the construction of new facilities.
Real estate specialists say data center customers have already leased or pre-leased more than 500 megawatts of data center capacity, shattering the previous record established during the cloud building boom of 2018.
“We’re just seeing a tremendous amount of growth,” said Sean Brady, a Managing Director at Cushman & Wakefield who specializes in data center real estate. “Major corporations and mid-sized corporations are in emergency mode, and moving their IT infrastructure to deal with the distributed workforce. In my estimation, cloud adoption has been accelerated by five years by COVID.”
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.
Much of this activity has been concentrated in Northern Virginia, the favorite expansion market for major cloud platforms and online video services.
“This is the biggest year we’ve ever had,” said Buddy Rizer, the Executive Director of Economic Development for Loudoun County, Virginia. “And remember that 2018 was what we thought would be the biggest year we’d ever be able to have. But it has been bigger this year.
“Everyone has grown their footprint,” said Rizer. “That includes all the major cloud providers – Microsoft, Google AWS – and all the colocation providers, including Digital Realty, Vantage. Equinix Aligned, Cloud HQ.”
“This is the biggest year we’ve ever had in Loudoun County. Everyone has grown their footprint.”
Buddy Rizer, Executive Director for Economic Development
Jim Kerrigan of North American Data Centers, an advisory firm that closely tracks the data center market, agreed that 2020 leasing will hit all-time highs.
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“I see overall leasing activity this year probably surpassing 2018, by about 15 to 20 percent, depending on what we happen to see drawn down the end of the year,” said Kerrigan.
The market gains in 2020 were discussed at a recent CAPRE Media event focusing on the Virginia market, and reinforced by securities analysts and recent commentary from industry executives on earnings calls.
Exceeding the 2018 Record Levels
The exact numbers for the 2020 leasing gains vary. By all accounts, there was an extraordinary volume of leasing in the second quarter of 2020 as businesses shifted to the work-from-home and schools adopted remote learning.
“High growth applications, like Zoom Video, public clouds (AWS, Azure), video games and other bandwidth intensive apps required MTDC (multi-tenant data center) customers to move fast and
accelerate expansion plans,” wrote Sami Badri, a Senior Equity Analyst at Credit Suisse, in an analysis of 2020 data center trends.
Brady of Cushman and Wakefield said 335 megawatts of data center space was absorbed in the first half of 2020, with active third-quarter leasing pushing the total past 500 megawatts for the year, based on data from C&W and datacenterHawk.
About half of that leasing was focused on Northern Virginia, with Cushman reporting robust activity also seen in Silicon Valley, Chicago, Atlanta and Portland/Hillsboro, while CBRE also saw strong activity in Phoenix and Dallas.
“The last time we saw this was back in 2018, where we saw a huge spike in the cloud providers leasing up space,” said Brady. “That was about 200 and 240 megawatts. This next expansion is bigger because of COVID-19 accelerating the demand.”
“As the pandemic continues, we are seeing signs of permanent adjustments that are likely to be long-term tailwinds for our business.”
William Stein, CEO of Digital Realty
The strong leasing has consumed much of the available capacity in leading markets like Northern Virginia and Silicon Valley. Badri of Credit Suisse tracks the supply/demand balance with a metric called “backlog intensity” that compares a developer’s quarterly revenue to its backlog – the capacity that is leased but not yet delivered.
“MTDC backlogs have grown materially in mid-2020, and the backlog intensity has picked back up to levels last seen in mid-2018.” said Badri.
No one illustrates that trend better than Digital Realty, which leased 90 megawatts of capacity in Northern Virginia early in 2020, and has pre-leased 100 percent of the data center space it has under construction.
“As the pandemic continues, we are seeing signs of permanent adjustments that are likely to be long-term tailwinds for our business,” said William Stein, CEO of Digital Realty. “More enterprises are embracing a distributed workforce with our growing work-from-home component.”
Next: Inventory backlogs create a boom in data center construction.