Data Center Leasing in Northern Virginia Hits Record 115 MW in 2017

The evening sun sets behind Building L, the massive new Digital Realty data center in Ashburn, Virginia. (Photo: Rich Miller)

ASHBURN, Va. – Developers in Northern Virginia leased a record 115 megawatts of data center space in 2017, topping the 113 megawatts (MWs) absorbed in 2017, according to a new report.

The robust leasing has left just 22 megawatts of finished wholesale space available for leasing, according to Allen Tucker of JLL, which released its overview of national leasing trends in 2017 at the CAPRE 2018 Data Center Forecast Wednesday in Ashburn, Virginia.

“I think we’re going to see huge amounts of construction in 2018,” said Tucker. “In Northern Virginia, supply creates demand, and demand drives supply.”

The historic gains of the past two years follow on 62 megawatts of leasing in 2105. No other data center market in the world has recorded more than 59 MWs of leases in a calendar year, Tucker said.

The strong leasing in Virginia was the highlight in a banner year of continued growth for the data center industry. JLL reported global net absorption of 583.5 megawatts of capacity, led by 363.5 MWs in the United States and Canada, 135 MWs in Europe and 85 MWs in the Asia-Pacific region.

The total for the U.S. and Canada marked an 8.6 percent decline from 2016, when cloud computing platforms’ appetite for capacity drove leasing to unprecedented levels. That record activity left analysts wondering whether the 2016 total was a temporary phenomenon or represented a “new normal.” The 2017 results, while down slightly from 2016, make a strong case that cloud growth has fundamentally changed data center demand for the foreseeable future.

“Every time something new and innovative comes along, this market gets better and stronger,” said Lee Kestler, Chief Commercial Officer at Vantage Data Centers. “Everything that can move to digital will do so. We’re not going to be put out of business. There’s going to be pockets of success for everyone.”

Consolidation Brings New Entrants

The JLL report also showed how the ongoing industry consolidation has impacted the competitive landscape in the world’s largest market. More than 85 percent of the leasing volume in Northern Virginia was controlled by just two firms:

Digital Realty landed 62 percent of leasing in Ashburn’s “Data Center Alley,” encompassing leasing at its two campuses and the properties added in its September acquisition of DuPont Fabros Technology, its primary competitor in Ashburn.
CyrusOne, which recorded 21 percent of the region’s leasing at its three campuses in Sterling.

That dynamic has triggered a surge of new players in Ashburn, who are betting that cloud providers will want to spread their data center capacity across multiple providers. CloudHQ, Iron Mountain and Central Colo entered the market in 2017, and Vantage Data Centers, Compass Datacenters and QTS Data Centers have all jumped into the market with large new campuses. COPT has emerged as one of the most active builders in the market, as it churns out new data center shells to support a massive expansion by Amazon Web Services.

The incumbents aren’t sitting still, either. Digital Realty is creating an enormous new campus, while RagingWire, CoreSite, Sabey Data Centers, Equinix and CyrusOne are all adding new capacity.

Talking data center growth at the CAPRE 2018 Forecast in Ashburn. From left tor right: Jim Leach of RagingWire, Vantage’s Lee Kestler and Stuart Dyer of CyrusOne. (Photo: Rich Miller)

Can the new competitors make inroads on the dominant leadership position of Digital Realty? Change can happen quickly in Northern Virginia, said Stuart Dyer, Business Development Manger for CyrusOne.

“When we entered the Northern Virginia market in 2014, people were saying ‘CyrusWho?’,” recalls Dyer. “We expected our first campus to last us seven years. It was filled in 12 months. We’re working on our third campus, and it’s no secret that we’re already looking for land in Loudoun County and the surrounding area to meet demand from our customers.”

“You can grow market share quickly in Northern Virginia,” said Tucker, who noted that no other market offers the type of explosive growth opportunity experienced by CyrusOne.

Kestler, a veteran of the Ashburn market, said the region has been transformed by the success of the data center industry.

“In 1999, this was all farmland,” said Kestler. “Now it is the white-hot center of the Internet. This market is the ‘A’ game for everyone.”

Phoenix, Atlanta on the Rise

The 115 MWs of absorption but Northern Virginia way ahead of all other U.S. markets. But it was an active year for both Chicago (44 MWs) and Dallas-Fort Worth (43 markets). Markets which saw strong year-over-year gains included Phoenix with 30 megawatts of absorption (up from 16 MWs last year), and Atlanta, which saw activity surge from 7 MWs in 2016 to 13 MWs last year.

JLL’s overview of the top six U.S. data center markets. Click the image to see a larger version of the chart. (Graphic: Allen Tucker, JLL)

Several geographic markets also saw a steep drop in activity, most notably Silicon Valley, where net absorption fell from 59 MWs in 2016 to just 10 megawatts in 2017. The two figures are related: the huge leasing from large cloud deals in 2016 filled the available data center space more rapidly than many service providers had anticipated. Several providers have new capacity on the way, which is being quickly leased. But the shortage of development properties in the Valley’s primary data center hub in Santa Clara, along with local regulation and permitting, results in longer lead times for new capacity.

Mergers caused a temporary slowdown in Seattle and Portland, according to JLL, particularly in the first six months of the year. “Demand bounced back significantly in the second half of 2017, as the Pacific Northwest settled from the impact of large-scale industry M&A,” the company said in its report.

The First Gigawatt Market?

The appetite for cloud capacity has prompted a burst of data center land deals in Northern Virginia, as data center developers lay the groundwork for the next phase of cloud growth.

Land values have soared past $1.2 million an acre in recent deals in Ashburn, the region’s largest Internet traffic intersection. Deals currently in the works could exceed that valuation, as the scarcity of prime development sites drives prices higher. JLL’s Tucker said the market may see several more new players, intensifying the competition for development properties.

Allen Tucker of JLL gives the keynote presentation at Wednesday’s CAPRE 2018 Data Center Forecast in Ashburn, Virginia. (Photo: Rich Miller)

Last year Loudoun County identified 43 new potential data center sites in response to the development boom. A similar process is underway near Manassas, according to Jim Gahres, Senior Business Development Manager for Prince William County.

“The county’s trying to look for more new data center sites,” said Gahres. “The demand is at an all-time high, and sites are going really, really fast. The size and scale of the projects has been increasing tremendously. Now, instead of a 10-acre site, we’re hearing requests for 100 acres, and up to 200 megawatts of power, or more.”

“We’re seeing no lack of interest,” said Kent Hill, the Manager of Strategic Economic Development at Dominion Energy. Hill said that’s prompting developers to consider properties that might require more site work prior to construction. “The ‘C’ sites from three years ago are now looking like ‘A’ sites,” he said.

Hill said the region’s growth is approaching new milestones. “It’s been said that Northern Virginia will be the first gigawatt data center market,” said Hill (full disclosure: we said that). “We’re starting to see that we’re actually close to delivering a gigawatt of electricity.”

During Wednesday’s CAPRE forecast event in Ashburn, there was optimism that the region’s growth would create many winners. “In a rising tide, all boats float,” said CyrusOne’s Dyer. “The tide is not slowing and there’s really no end in sight.”

“The momentum we have in Northern Virginia is outstanding,” said Leach of RagingWire. “The next Ashburn is Ashburn.”