Intelligent Investment

North America Data Center Trends H2 2022

febrero 17, 2023 ConsumptionTime

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State of the Market

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  • In 2022, primary market supply grew 17% year-over-year to 3,928.7 MW. However, the rate of growth began slowing in H2 2022 due to supply constraints and macroeconomic conditions.
  • Power constraints continue to affect major primary markets like Northern Virginia and Silicon Valley. In Northern Virginia, operators expect Dominion Energy to provide significantly less power for development until 2026. In Silicon Valley, transmission substation sites can’t be energized until 2028-2029.
  • Data center operators in 2022 were more focused on where power is available than on geography. Markets with access to power, such as Atlanta, have been beneficiaries of the Northern Virginia power restrictions. Atlanta has over 1 GW of new planned capacity.
  • Limited supply and strong demand drove up rental rates in H2 2022. The average asking price across primary wholesale colocation markets for a 250- to 500-kW requirement increased by a whopping 14.5% year-over-year, to $137.90 per kW/month.
  • Primary markets saw 686.9 MW of positive absorption in 2022, up 193.6 MW (39.1%) from 2021. Northern Virginia, the world’s largest data center market, is responsible for 64% of this total. Despite power and land restrictions, Northern Virginia continues to see strong demand.
  • Supply chain disruptions have caused construction timelines to be extended. Lead times for key pieces of infrastructure such as substations have doubled in the last six months.
  • Despite the current economic climate, the construction pipeline within primary markets increased 153% year-over-year, to 1,839.9 MW.
  • The overall vacancy rate in primary markets is a record-low 3.2%. All primary markets except Silicon Valley saw their vacancy rates fall from a year ago.
  • Total absorption for secondary markets in 2022 totaled 117.1 MW. Hillsboro accounted for 54% of this.

H2 2022 Wholesale Primary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H2 2022 and H2 2021.
**Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements.
Source: CBRE Research, CBRE Data Center Solutions, H2 2022.

H2 2022 Wholesale Secondary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H2 2022 and H2 2021.
**Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements.
Source: CBRE Research, CBRE Data Center Solutions, H2 2022.

National Pricing

  • The average monthly asking rate for a 250- to 500-kW requirement across primary markets increased by 14.5% year-over-year, to $137.90 per kW/month.
  • Supply constraints, coupled with strong demand, have put a premium on any available space.
  • Extended lead times for many key pieces of infrastructure such as substations have delayed construction timelines, further exacerbating the supply and demand imbalance.
  • Data center construction costs are at an all-time high due to escalating energy and material prices. Data center operators are raising rates to remain competitive.
  • While U.S. energy prices have not increased as meaningfully as they have in Europe, global operators are passing through costs to U.S. clients. This is impacting national pricing of new renewals and new leasing. Increases in cost across power, labor and equipment are a primary concern.

Average Asking Rental Rate with Y-o-Y % Change for Primary Markets

Source: CBRE Research, CBRE Data Center Solutions, H2 2022.

Capital Markets Insights

Equity and debt investors remained interested in the resilient data center asset class in H2 2022, despite a constrained capital markets environment. They were attracted to the strong industry fundamentals of positive rental rate growth, historically low vacancy and record demand. The 10-year US Treasury yield closed 2022 at 3.88%, versus a 2021 high of 1.75%, illustrating the year-over-year cost increase of debt financing. H2 2022 saw further price discovery and fewer offerings by sellers, as the market adjusted to the widening of investor returns. As a result, overall sales volume for data center assets declined approximately 20% year-over-year.

Looking forward to 2023, we anticipate an uptick in enterprise sale-leaseback opportunities as users raise capital. We also anticipate partial interest trades for stabilized product, where experienced operators require additional capital to fund future developments.

Notable H2 2022 investment activity:

  • DigitalBridge and IFM acquisition and take-private of Switch in $11 billion transaction
  • Stonepeak investment of over $3 billion, an approximate 36% stake, in CoreSite’s data center business
  • Partners Group acquisition of EdgeCore Digital and commitment to fund up to $1.2 billion for future development

Inventory Growth of Primary Data Center Markets Since 2015

Source: CBRE Research, CBRE Data Center Solutions, H2 2022.

Valuations Insights

Investors remain focused on top-tier data centers with strong credit tenancy, significant remaining lease terms, and ability to meet customer demand for the right connectivity, cloud on-ramps and density. There was limited transactional data in H2 2022. This is likely due to elevated inflation, higher interest rates, and rate uncertainty in the near- and long-term.

Investors are seeking lower acquisition costs for leased facilities than this time last year because higher interest rates are harming their ability to meet required return thresholds. Data center providers and customers continue to secure land positions in strategic markets, with suitable site inventory scarcity causing buyers to get creative and create bidding wars for offerings that meet established power and fiber profiles.

Trends relating to supply chain, inflation and underlying in-market supply and demand dynamics continue to impact rental rate and concessions underwriting assumptions. There is upward pressure on NRCs, rental rates and other MRCs in certain markets.

Vacant and second-generation enterprise data center acquisitions remain increasingly difficult to underwrite. Physical characteristics and market fundamentals at the time of sale are increasingly more important, especially considering speed-to-market and power availability impacts. Enterprise facilities built for a specific use, with limited consideration for their second-generation market appeal, are often trading at a significant discount to replacement cost. Those assets with critical environments that support modern customer densities or that possess a fiber-rich network topology can limit the discount to replacement cost.

Primary Markets, Historic Net Absorption, Preleasing & Under Construction

Source: CBRE Research, CBRE Data Center Solutions, H2 2022.

Network Insights

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The Proliferation of Fiber

In the U.S. alone, public and private entities are spending billions to build and optimize long-haul, middle-mile and metro fiber networks. Most fiber deployments occurred in densely populated or well-funded areas, financed by telecommunications companies that eventually operate them. But networks have spread into rural, underserved areas in recent years, funded by alternative sources.

In H2 2022, momentum continued from the $1.2 trillion federal infrastructure bill passed in November 2021. The law, which included $65 billion for broadband, has begun to fuel plans for fiber deployments at unprecedented rates, particularly in rural areas. Examples of this funding being deployed:

  • 900+ municipal entities across the U.S. are either building or expanding their networks
  • Seven States Power Company, an energy solutions company, created a single broadband entity to connect 153 local power companies for fiber-based services across seven states
  • The State of California has started construction on a $3.8 billion middle-mile network, designed to provide 10,000 miles of fiber for constituents
  • Several state DOTs are actively adding fiber along highway rights-of-ways to further enable broadband and power their growing internal data and IT systems needs
  • 31 States allocated CSFRF (Coronavirus State and Local Fiscal Recovery Funds) on broadband initiatives and projects

The Impact: More Fiber in More Places

We view more fiber in more places as a catalyst for the overall advancement of digital infrastructure. As fiber networks expand into uncharted territories, data centers, macro cell towers, edge data centers and small cell deployments all benefit. Critically, improving connectivity profiles in secondary markets and beyond will likely create transformative economic growth.

Additional Network Trends on the Horizon

Small cell adoption is critical for carriers in 2023. While use cases for 5G networks have been slow to materialize, we believe significant progress in IoT, Health Care, Manufacturing, and Agriculture will drive more end-user demand.

Macro cell towers will continue to show strong growth and increased demand from wireless carriers, to expand and improve their network. Rural connectivity will likely continue gaining momentum in 2023, with incentives and fixed wireless deployments benefiting tower companies.

Edge data centers are emerging closer to the end-user. As a result, we expect deployments at towers’ base stations will become an attractive home for smaller-sized structures.

Net Absorption vs. Under Construction by Primary Market, H2 2022

Source: CBRE Research, CBRE Data Center Solutions, H2 2022.

Net Absorption vs. Under Construction by Secondary Market, H2 2022

Source: CBRE Research, CBRE Data Center Solutions, H2 2022.

Data Center Outlook

  • We expect the pace of digital transformation to keep increasing as companies adapt to a hybrid workforce. Private Cloud and Private 5G networks are now a top priority for Fortune 500 companies.
  • Clients and end users are seeking ways to reduce Scope 1, 2 and 3 emissions for carbon reduction mandates, but supply chain delays and power complications may adversely affect this. We expect operators to expand into markets where renewables are heavily utilized for electricity supply, to achieve their own and clients’ carbon neutrality targets.
  • Environmental considerations will likely continue impacting site selection. This year, we expect more firms to source and generate renewable energy adjacent to data center facilities. Additionally, water use and availability in the Southwest are important considerations in site selection. A study from the Bureau of Reclamation showed Lake Mead could reach an all-time low this year.
  • Prices are expected to continue rising in H1 2023 due to power constraints and lack of available power for expedited development.
  • Although large hyperscalers remain the biggest data center users, the market has also seen a resurgence in enterprise demand. This rapid growth may diminish throughout 2023 as less new supply may be delivered. There is a lack of power and land availability in major markets like Northern Virginia and Silicon Valley.
  • Data center occupiers’ power requirements will grow, leading to larger lease deals in 2023. Power supply constraints will be the biggest impediment to new development in some primary markets like Northern Virginia and Silicon Valley. As a result, hyperscale demand will grow in secondary markets with cheaper land, greater power supply and favorable tax incentives.
  • Delivery of future enterprise and colocation supply may be slowed by supply chain disruptions, and lack of power and land availability, in major markets like Northern Virginia and Silicon Valley.

Trends to Watch

  1. From 2020-2023, the digital infrastructure transformational curve has been pulled forward to provide end-users with improved connectivity and reliability via fiber enhancements, improved wireless networks and growth of cloud adoption. Mobile phones, laptops, TVs and wearable devices heavily rely on data centers for performance, quality and speed. As connectivity keeps improving at schools, homes and workplaces, what new devices and applications will we see data centers support in H1 2023?
  2. Will telecom carriers meaningfully increase 5G Small Cell deployment in H1 2023, compared to what we’ve seen in the last 12-24 months? As densification increases, how will this impact Edge data center construction and prioritization?
  3. Edge data center development continues to increase. SoFi Stadium in Los Angeles successfully utilized its own modular data center and the Buffalo Bills plan to include an on-site data center with its new stadium. In H1 2023, will legacy stadiums and concert venues upgrade their infrastructure to offer fans and users improved digital experiences?
  4. Transmission and distribution of power continues to limit data center expansion in H2 2022. Will this jumpstart alternative and widespread renewable energy supply? How will solar plants in major solar industry markets such as Phoenix, Southern California, Las Vegas and Reno factor into this equation?
  5. Energy prices have meaningfully increased in Europe. Will U.S. data center clients be directly affected because global operators raise prices to maintain margins and growth via expansion?
  6. As renewable energy sources adjacent to data centers continue driving interest from operators and investors, will we see a continued population migration out of urban environments and into rural locations? Does connectivity, power and water continue to remain a top priority for site selection?
  7. Will we see record leasing demand continue in H1 2023, driving rental rate pricing increases?
  8. During a 3Q 2022 conference call, a major data center operator noted: “In hyperscale, we had strong demand across all regions with Portland/ Hillsboro being the largest growth [market].” Which secondary market will be the fastest growing market in H1 2023? What tax incentives will drive demand to new markets?
  9. Rural access to high performance connectivity and broadband complications continue to exist across the U.S. Outdated copper and coaxial cables limit performance and bandwidth. While being directly supported by data centers, which major operators and investors will prioritize utilizing federal incentives and funding to deploy Fiber to the Home, Fixed Wireless and Internet access for consumers in H1 2023?
  10. As Fixed Wireless demand continues to drive densification, will Edge data centers become an increasingly important component of low-latency and high-performance computing?
  11. Compute expansion will be required as IoT, Fixed Wireless and Private 5G Wireless network use-cases continue gaining traction and demand. Will we see new emerging markets in our report for H1 2023?
  12. Computing and storage was on-premises before the Cloud. Companies were each required to buy servers, switches, storage arrays and databases from suppliers. As cloud migration continues, this capital expenditure cost has transferred to data center operators. Will cloud migration continue increasing or will companies develop their own data centers?
  13. Historically, clients migrated to the cloud to fuel top-line revenue growth or reduce expenses. What other main drivers exist this year?

Market Buzz

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Des Moines

Des Moines, Iowa has received many renewable energy accolades. The major utility company in the area, MidAmerican Energy, claimed in 2021 that 88.5% of the city’s annual electric usage comes from renewable generation. While many states suffer energy shortages, rising costs and lack of renewable supply, Des Moines can help end-user clients reduce Scope 1, 2 and 3 emissions. We look to this market for additional meaningful development in 2023, due to Fortune 100 companies’ aggressive ESG goals with 2025 and 2030 deadlines.

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Columbus

When our clients seek an emerging market that features ample land and water supply, low natural disaster risk and aggressive tax incentives, Columbus, Ohio tops our list. Major operators and hyperscalers have continued growing in Columbus, and in nearby areas like New Albany, Hilliard, Dublin and Delaware. From a geographic convenience perspective, Columbus is centrally located between major developed data center markets, including Northern Virginia, Atlanta and Chicago. Additionally, over 50% of the U.S. population lives within 750 miles of Columbus, which is advantageous for clients wanting to build and develop closure to end users.

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Calgary

Calgary has seen meaningful data center activity growth from a major cloud provider establishing a new region in Alberta. While large land sites in Calgary are increasingly limited, this cloud organization successfully used a three-pronged approach: acquiring their own land site, and leasing through third-party operators, while developing the greenfield site. Data center growth in the Western Canada and Calgary area will help reduce latency for end users. Calgary’s energy costs soared in 2022, as natural gas prices spiked. This drove energy costs over $0.30 per kw in some accounts with variable plans, making it the most expensive electricity in Canada. Rates have declined and ranged in the mid-high teens so far in 2023.

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Vancouver

Google helped the Vancouver market gain notoriety by constructing the first-ever fiber cable from Canada to Asia, set to go online in 2023. The landing zone is implemented for the cities of Shima and Takehagi in Japan. We expect data center operators and developers to tap into this infrastructure to service clients across the two continents. Data center development is competing with other asset classes for extremely scarce land and industrial sites. Therefore, other regions outside of Vancouver, like Surrey, are gaining attention.

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