The growth of cloud computing is driving a data center building boom. Construction of new data center space is at a five-year high, with nearly 300 megawatts of projects under construction, according to a new report from North American Data Centers, a real estate firm tracking the data center sector.
The new data illustrates how the needs of hyperscale providers are changing the way IT space is built and sold, as data center providers revamp their construction strategies to deliver capacity faster, and in larger chunks.
The “trend behind the trend” is the ongoing shift of enterprise IT workloads, which are moving out of on-premises data centers and into purpose-built facilities operated by cloud platforms and colocation providers.
Available Inventory Shrinking
The surge in construction activity comes as the available inventory of data center space is at a five-year low, and reflects growing confidence that developers will be able to lease space in leading geographic markets. There is now just 167.4 megawatts (MWs) of available wholesale space in North American market, down from 219 megawatts at this time last year. Meanwhile, there is now 294 megawatts of multi-tenant data center (MTDC) space under construction, nearly double the 149 MWs of construction at the start of 2017.
Between available data centers and those under construction, total inventory is 25 percent higher than a year ago. That’s a big jump, especially since the volume of hyperscale leasing decreased slightly from the record levels of 2016.
Is that increase a sign of overbuilding? The numbers are slightly deceiving, as some of that space is already spoken for, according to Jim Kerrigan, the Managing Principal of North American Data Centers.
“While hyperscale leasing is down compared to 2016, there are several properties under contract or recently purchased by MTDC developers,” said Kerrigan. “Leasing activity from hyperscales may prove to be higher than is divulged.”
Kerrigan said there also hasn’t been any sign of the market being disrupted by aggressive pricing, which often occurs when developers have a surplus of space.
“Overall rental rates and concessions continue to hold steady, while construction costs have declined,” Kerrigan notes in the report.
Northern Virginia Dominates Activity
A large chunk of the new activity is focused on Northern Virginia, the world’s largest data center market, where appetite for cloud capacity has prompted a burst of leasing and land deals as data center developers lay the groundwork for the next phase of cloud growth.
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“Multi-tenant data center (MTDC) inventory under construction is almost double of what it was 12 months ago led by Northern Virginia,” writes Kerrigan. There is currently 40.9 MWs of space available in Northern Virginia, and 79.1 MWs of new construction underway, meaning developers expect the market to absorb about 120 MWs in 2018.
That would seem like a lot of inventory for most markets. But multi-tenant data center operators leased 113 megawatts of capacity in Northern Virginia in 2016, according to market data from Allen Tucker, leader of the Mid-Atlantic Data Center Solutions practice at JLL.
Of the capacity currently under construction in Northern Virginia, about 65 percent is pre-leased , according to an analysis from CBRE.
Data center leasing trends vary across different geographic markets, and the North American Data Centers report outlined the supply-and-demand picture around the country:
- Leasing activity was subdued in Chicago in 2017, primarily due to lack of inventory through much of the year. One constraint has been a lack of power capacity in the Suburban Chicago market near O’Hare airport. That will be addressed by a 120 MW expansion of the Itasca substation by mid-2018, with additional 120 MW by 2020, which will help spur several new developments.
- Both Switch and CyrusOne have announced large new multi-tenant data center projects in the Atlanta market. Kerrigan notes that historically there has been less than 6 MWs of leasing activity annually in the Atlanta market.
- Strong leasing activity in Dallas came from tenants expanding, not hyperscale users. The Dallas/Fort Worth market is in major expansion mode, with active new construction across the Dallas suburbs of Plano, Garland and Allen.
- The Santa Clara market was short on supply for the first half of 2017, but new construction allowed Vantage Data Centers to lease 13 MW of space.
- In Phoenix, two of the year’s largest deals were won by a new player in the market, as Aligned Data Centers signed leases with Uber and Paypal, according to North American Data Centers.
The Trends Behind the Numbers
As the tech sector’s largest names invest heavily in the cloud, they are looking to quickly deploy tens of thousands of new servers. Microsoft, Google, Amazon and Oracle are working to procure unusually large amounts of data center space. In response, data center developers are retooling its data center construction operation to build bigger, faster and at lower cost.
Leasing activity in 2017 was paced by Apple and Facebook, which have focused on company-built data centers in recent years but resumed leasing large chunks of wholesale space last year. Apple leased 29.5 megawatts in Virginia and Chicago, while Facebook lined up 22 megawatts of new space in Ashburn, Virginia. All of those leases were in data centers operated by DuPont Fabros Technology (DFT), which was acquired by Digital Realty in September.
Microsoft also continued to be a major consumer of wholesale space, albeit at a slower pace than in 2016. The company signed two large leases with CyrusOne, lining up 18 MWs in San Antonio and 12 MWs in Phoenix, according to North American Data Centers. CyrusOne also landed a 10 MW deal with Google in Ashburn, the report said.
Ride-sharing and logistics company Uber emerged as one of the year’s major users, leasing 5 MW from Aligned Data Centers in Phoenix, and a similar amount from Digital Realty in Ashburn, according to North American Data Centers. Another company reported to be taking down significant space was graphics chipmaker NVIDIA, which added 5 megawatts of space in Santa Clara, including a 3 MW deal with Vantage and a 2 MW deal with high density specialist Colovore.
Kerrigan said data center providers should see growing demand from new technologies. “Expect an uptick in demand to absorb space by Internet of Things (IOT), Artificial Intelligence (AI), and large Chinese cloud providers,” said Kerrigan. “Blockchain and cryptocurrency requirements are driving new N solutions (space with no generators or UPS backup) with less expensive power.”
Cloud growth has also brought new investors into the data center sector, making it easier for developers to scale their operations and finance more ambitious projects. There was a record $20 billion in investment activity and data center M&A in 2017. Kerrigan said there is a “significant uptick” in private equity and venture capital firms looking at data center investments.
Read the full report at the North American Data Centers site.