Data Centers See Sharp Rises in Power Costs, Lease Rates

Connect CRE recently examined the impact that availability of power has had on data center development, which has more than doubled since 2018 to 8.6 gigawatts domestically. This time, we’re looking at the cost of power and lease rates, both critical factors for the decision-making of both data center operators and tenants. 

“Since the pandemic, both power and lease rates have shifted dramatically,” said Jacob Albers, head of alternatives insights at Cushman & Wakefield. “In terms of power, the major data center markets saw a sharp rise in utility costs in mid-2022, driven by supply chain challenges and inflation before retreating later that fall.  

“Starting in September 2022, power price growth began to moderate across major markets, though there were noticeable differences in how much rates decreased,” he continued. “By March, each of the top six American markets showed a rolling year-over-year increase of at least 11% in the cost of electricity – with an average increase of 23%.” 

The largest Y-O-Y increases for hyperscale lease rates (over 4 MWh) came from Silicon Valley (45.3%) and Northern Virginia (30%), driven additionally by limited supply and low vacancies. Dallas, Phoenix and Chicago saw increases ranging between 12% – 18%. Atlanta—which had the largest increase in power costs—saw the smallest increase in hyperscale lease rates, at 2.9%. 

Albers reported that lease rates for both hyperscale and wholesale data center space show that while energy prices can impact the market, other factors—namely the rapid rise of inflation—are playing a key role. “In January 2022, the core consumer price index (CPI) for all urban consumers surpassed 6%, and the impact on the energy market was quick,” he wrote.  

In the hyperscale market, lease rates in the early part of 2023 were driven not only by energy prices, but also the performance of lease rates and power cost . Asking rates in Atlanta remained flat, but every other market saw an increase of 4.5% to 6.5% during the first few months of the year.  

The increase in power costs on a Y-O-Y basis in those markets ranged from 3.4% to 59.6%. Chicago and Phoenix have seen the most similar trends, with the cost per kilowatt per month leasing rates within $2 to $5 from 2019 through the early part of 2023, despite a noticeably higher increase in electricity costs in Chicago. 

“The market is clearly one where providers and tenants will need to be aware of the specific utility pricing for their municipality,” said Albers. “Despite the increasing cost of the market, interest from a host of users has grown with high-performance computing (HPC) opportunities in the market associated with surging interest in artificial intelligence.” 

Although Northern Virginia and the other members of data centers’ top six U.S. markets aren’t likely to be displaced any time soon, Albers noted that “demand for data center space means additional development will be needed, and many more markets have growing pipelines of data centers that range from edge to hyperscale sizing. Power costs will be important when deciding where those projects are located, although other factors, including geographic location, availability of land, zoning ordinances, regulatory issues and construction costs, will need to be considered as well.”