Data Center Sector: Increased Supply, Much-Higher Demand

As the world continues to digitize, demand for more space increases. During the first half of 2023, the North American data center market was characterized by robust growth and construction. But demand continues to outstrip supply, according to CRE reports.

The Metrics

CBRE’s North America Data Center Trends H1 2023 report explained that supply in primary markets increased by 12% (491.5 MW) in H1 2023 compared to H2 2022. Supply also increased by 19% (738.2 MW) year over year.

The CBRE report also said that a record-high 2,287.6 MW was under construction in primary markets, with 1,673.1 MW (73.1%) pre-leased. Meanwhile, the overall vacancy rate for primary markets is at 3.3%.

JLL’s “North America Data Center Report” said that 3,166.7 MW total was under construction in all markets during the first half of 2023, and “most major and secondary markets are struggling with a supply and demand imbalance.” Specifically, most of the supply to be delivered in late 2023 and 2024 has either been pre-leased or is under exclusivity, “resulting in limited options for users,” JLL said.

Investor Appeal and Demand Drivers

Matthews Real Estate Investment Services pointed out in its “Data Centers Fall 2023 Update” that the world continues to digitize, meaning that “investors continue to look at (data centers) as a secure and profitable investment option.” Though 2023 has been highlighted by high-interest rates and ongoing market volatility across most asset classes, data centers show “stable fundamentals” as technology companies plan to expand.

The Matthews report explains that one appeal of data centers is that “consumers typically don’t limit their data usage or change data plans during economic downturns.” As such, revenue continues to be generated, even during uncertain times.

As a result, investor interest is – and will continue to remain – high. “(This) will continue to attract diverse financing to fuel growth,” JLL analysts commented.

The CBRE and JLL reports indicate that artificial intelligence is driving data center demand in most major markets, with “many AI startups (seeking) large requirements between 5 to 25 MW,” CBRE said. Added JLL: “As AI requirements grow, data center operators need to adapt their infrastructure to accommodate high-power density server clusters.”

Data Center Outlook

According to JLL, supply and demand imbalances mean that “users need to be in the market for capacity well in advance of their preferred go-live date.”

The CBRE report noted that power availability and capacity will be challenging for data center developers and operators. Increased construction costs and costs of building materials and labor will prevent overbuilding or oversupply. Furthermore, U.S. data center operators are being challenged to decrease Scope 1, 2 and 3 emissions to reduce carbon “while also overcoming supply chain delays and power shortages,” the CBRE report said.

JLL agreed with this, indicating that operators must plan to adapt their infrastructure “and innovate for cooking and efficiency to meet sustainability goals.”