strong fundamentals lead to record- setting … · strong fundamentals lead to record-setting...
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U.S. DATA CENTER TRENDS REPORT H1 2017
Strong Fundamentals Lead to Record-Setting Investment in Data Centers
CBRE Research` © 2017 CBRE, Inc. | 2
U.S. DATA CENTER TRENDS REPORT H1 2017
Contents
04 Market Fundamentals
06 Supply & Demand
10 Investment / M&A
12 Things to Watch
13 Primary Markets
17 Secondary Markets
20 Market To Watch
CBRE Research` © 2017 CBRE, Inc. | 3
U.S. DATA CENTER TRENDS REPORT H1 2017
CBRE Research
Executive Summary
• Investmentindatacenterrealestatereachedafeverpitchinthefirsthalfof2017.
• Absorptionwassubdued,ashyperscalecloudusersstayedonthesidelinesinH1,astheydigestedlastyear’senormousleasingvolume.
• Proximityandaccesstocloudservicesandlatency-sensitiveinterconnectionnodestoexistingnetworksarestillthestrongestdriversofretail/colocationrequirementsforenterpriseusers.
• Nationalpricingstandardizationofrentalratescontinuestoemerge,wherevariabilityinpricingisdictatedmorebytheneedandtypeofrequirementversusgeographyormarketlocation.
• Thereisahighertoleranceforspeculativedatacenterdevelopmentasprovidersbecomemorecomfortablewiththestrengthoftheirsalespipelineandthetransparencyofuserexpansiongoals.
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U.S. DATA CENTER TRENDS REPORT H1 2017
CBRE Research
Followingasubstantialrunofmulti-megawatt(MW)leasesthatcontributedtorecord-levelsofnetmulti-tenantdatacenterabsorptionineachofthepasttwoyears,hyperscaleCloudServiceProviders(CSPs)werelargelyonthesidelinesinthefirsthalfof2017.WiththebulkofCSP-relatedactivityoccurringaspre-leasinginnewdatacenterprojects,it’snotsurprisingthathyperscaleusersaretemporarilyfocusedonbuildingoutanddeployingtheircloudinfrastructure.However,therobustadoptionofrapidlyevolvingdata-intensivetechnologyremainsonanearlyunwaveringupward
trajectoryandwilldrivestronggrowthofthedatacentersectorgoingforward.
CBREmeasuresnetabsorptioninthedatacentersectorasthenetchangeinexisting/commissionedwholesalepowercapacityandthefirsthalfoftheyearsawnearly88MWofpositiveoccupancygains,amongthesevenmajordatacentermarkets.1TheNorthernVirginiamarketinparticularremainsastrongoutperformer,withnetabsorptiontotalingnearly42MWinH12017—onpacetomatchandpotentiallyeclipse2016’sfull-yeartotalofmorethan84MW.
Market Fundamentals
*Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements. Arrows indicate changes in H1 2017.Source: CBRE Research/CBRE Data Center Solutions, H1 2017.
Figure 1: Market Fundamentals
Market Inventory (Q4/Q2) Vacancy (Q4/Q2) Net Absorption Rental Rates (kW/mo)*
Northern Virginia 608 MW (é 52 MW) 35.2 MW / 5.8% (é 120 bps) 41.5 MW $120-$145
Silicon Valley 169 MW (é 14 MW) 9.0 MW / 5.3% (é 70 bps) 12.0 MW $145-$165
Chicago 188 MW ( -0 MW) 4.0 MW / 2.1% (ê 310 bps) 4.2 MW $130-$145
New Jersey/New York 155 MW ( -0 MW) 28.2 MW / 18.2% (ê 110 bps) 2.9 MW $130-$150
Dallas/Fort Worth 231 MW (é 23 MW) 38.8 MW / 16.8% (ê 300 bps) 22.0 MW $120-$145
Phoenix 169 MW (é 14 MW) 14.9 MW / 8.8% (é 570 bps) 3.8 MW $120-$135
Atlanta 117 MW (é 9 MW) 10.8 MW / 9.2% (ê 220 bps) 3.0 MW $120-$135
Southern California 88 MW ( -0 MW) 14.0 MW / 16.3% (ê 170 bps) 1.9 MW $130-$160
Seattle 107 MW (é 2 MW) 19.9 MW / 18.8% (ê 220 bps) 2.2 MW $120-$150
Boston 60 MW ( -0 MW) 14.7 MW / 24.4% (ê 170 bps) 1.0 MW $150-$180
1Atlanta, Chicago, Dallas/Fort Worth, New York Tri-State Region, Northern Virginia, Phoenix and Silicon Valley.
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U.S. DATA CENTER TRENDS REPORT H1 2017
CBRE Research
Withhyperscaleusersstilldigestinglastyear’senormousleasingvolume,newleasesinH12017werelargelybyenterpriseuserswithsmallerrequirementsofbetween500kilowatts(kW)to1MW.Forthisreason,therewereonlyahandfuloftransactionsformorethan1MWinH12017.
Majormarketsarestillfavoredbybothhyperscaleandenterpriseusers,aswellasthird-partydatacenteroperators—atrendthatshowsnosignsofslowinginthenear-term.Proximityandaccesstocloudservicesandlatency-sensitiveinterconnectionnodestoexistingnetworksisstillthestrongestdriverofretail/colocationrequirements.
Source: CBRE Research, H1 2017.
Figure 2: Primary Markets - Net Absorption & Pre-Leasing
Mega
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2015 2016 H1 2017 Pre-Leased
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U.S. DATA CENTER TRENDS REPORT H1 2017
SPECULATIVE DEVELOPMENT ON THE UPSWING
Thedatacentersupplypipelinecontinuestoaccelerate,withnearly284MWofwholesalecapacitycurrentlyunderconstructioninCBRE’sprimarydatacentermarkets.Thatcapacityisalready46%pre-leased(131MW).Dependingonwhentheseprojectsarecompleted,thislevelofpre-leasingimpliesthatannualnetabsorptioncouldapproachtotalsofthepasttwoyears.Whilepre-leasinglevelshaveconsistentlybeenin45%-to-65%rangeoverthepastseveralyears,therehasbeenasubtleshiftinthepastseveralquarterstoahighertoleranceforspeculativedevelopmentasaresultofsustaineddemandfordatacenterservices.Inparticular,hyperscaleCSPsaremoreopenlysharingtheirexpansiongoalswithdatacenterproviderstoencouragespeculativedevelopment,asspeed-to-marketisoftenacriticalfactordrivingthesedeployments.
NorthernVirginiaremainsthemostactivedevelopmentmarket,withmorethan10new
Supply & Demand
Source: CBRE Research, H1 2017.
Figure 3: Net Absorption Vs. Under Construction By Market
Atlanta Chicago Northern VA Phoenix Silicon Valley New York Tri-State
Dallas Fort Worth
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YTD Absorption Under Construction
projectscurrentlyunderwaywithaneye-popping119MWofwholesalecapacity.NorthernVirginiaisthelargestandmostactivedatacentermarketintheworld,withitswholesaleinventorylargerthanthatofanycountryinEuropeorAsiaPacific.OthermarketswithsignificantsupplypipelinesincludeDallas/FortWorth(47MW),Chicago(41MW),SiliconValley(30MW)andPhoenix(28MW).
Vacancyratesforexisting/commissioneddatacenterspaceinprimarymarketsremainedrelativelyunchangedinH1.SiliconValley(5.3%)andChicago(2.1%)havethelowestexistingvacancyratesinthecountry,effectivelylimitingimmediateoptionsinthesemarkets.Userswithasignificantnear-termwholesaleneedareeffectivelylimitedtopre-leasingorwaitingforthedeliveryofnewcapacity.Giventhetightmarketconditionsandstrongdemand,developersareactivelycompetingforstrategiclandsitesinbothprimaryandsecondarymarkets.
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U.S. DATA CENTER TRENDS REPORT H1 2017
AsU.S.multi-tenantdatacentermarketscontinuetomature,thebalancebetweenspeculativelyavailablesupplyandestablisheddemandiscritical.Bycomparison,coremarketsinbothEuropeandAsiaPacifichaveaveragedvacancyratesofbetween15%and20%forthepastseveralyears,withavailabilitysometimesaveraginguptothreeyears’worthofannualaverageabsorption.
THE EMERGENCE OF NATIONAL PRICING
Since2015,therehasbeenvirtuallynochangeinaveragewholesalerentalratesintheU.S.(asmeasuredonaspaceandpowerbasis).Thelargestinfluenceonratevarianceisoftendictatedbytermlengthandcreditqualityofthetenant.Onadirectcomparisonbasis,averageratesforastraightforwardTierIII/N+1wholesaledeploymentintheU.S.stillrangebetween$125and$145perkWpermonth(modifiedgross)acrosseitherprimaryorsecondarymarkets.
Thisunderpinsthegrowingemergenceofnationalpricingstandardization,wherepricingvariabilityisdictatedmorebytheneedandtypeofrequirementthanbygeographyormarketlocation.Specificfactorsaffectingpricinginclude:
• Thespecificresiliencyneedsoftherequirement(i.e.,Nvs.2N,lowdensityvs.highdensity).
Source: CBRE Research, H1 2017.
Figure 4: Construction Pipeline – Available & Pre-Leased Supply Under Construction
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0Northern Virginia
Dallas/ Fort
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Chicago New York Tri-State
Pheonix Atlanta BostonSeattle Southern CA
Pre-Leased Available
• Thetypeofapplicationsbeingdeployed(i.e.,disasterrecoveryvs.high-frequencytrading).
• Theoperatingmodelandmarketnicheofthedatacenteroperator(i.e.,wholesalevs.services-centricretail).
• Thelevelofservicesutilizedbythetenant.
Total-cost-of-occupancy(TCO)factorsthatarespecificallyuniquetocertaingeographicareas—suchasutilitycosts,taxratesandanydatacenter-specificincentiveprograms—oftenplayamorecriticalroleinmarketsiteselectionthanprevailingrentalrates.
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U.S. DATA CENTER TRENDS REPORT H1 2017
RECOVERY CONTRACTION
EXPANSION BALANCED/ GROWTH LA
ND
LORD
FA
VORA
BLE
TEN
AN
T FA
VORA
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VACANCY UNDER SUPPLY RENT
VACANCY OVER SUPPLY RENT
MARKET EQUILIBRIUM
Southern
Silicon ValleyNorthern Virginia
Pheonix
Chicago
New York Tri-State
Dallas/ Fort Worth
Atlanta
Source: CBRE Research, H1 2017.
Figure 5: Data Center Market Cycle*
DEMAND: A TALE OF TWO SEGMENTS
Portland MA
RKET
GRO
WTH
MARKET PROFILE
Minneapolis
Denver
MATURE/ PRIMARY
EMERGING/ SECONDARY
DEVELOPING/ TERTIARY
HIGH
MODERATE
LOW
North Carolina
Northern Virginia
Dallas/ Fort Worth
New York/New Jersey
Atlanta
Phoenix
Chicago
Silicon Valley
Southern California Austin/San Antonio
Las Vegas
Boston
Houston
Source: CBRE Research, H1 2017.
Figure 6: Data Center Market Maturity
*The Data Center Market Cycle Graph reflects the current wholesale market conditions, taking into consideration the following variables:
• Demand (leasing, absorption, requirements in the market)
• Supply (existing vacancy, future availabilities, construction pipeline)
• Rental rate trend
Distance from the horizontal market equilibrium line generally implies the relative strength and/or weakness of a market relative to each other and their historical trends. Arrows indicate most recent trend.
Categories typically represent the following conditions:
Expansion: landlord/provider-favorable conditions; un-der-supplied market, strong demand, declining vacancy and upward pressure on pricing
Balanced/Growth: landlord/provider-favorable conditions; new supply more evenly balanced, stable or slightly increas-ing vacancy, rent growth slowing or flat
Contraction: tenant-favorable conditions; over-supplied market, increasing vacancy, weak demand, downward pressure on pricing
Recovery: tenant-favorable conditions; stable or slightly declining vacancy, moderate but improved demand, rent growth flat or increasing
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U.S. DATA CENTER TRENDS REPORT H1 2017
What do enterprise users want?
DuetotherapidadoptionofhybridITsolutions—avariablemixofcloudservices,third-partycolocationandowned,on-premiseinfrastructure—theinitialthird-partyITrequirementsbyenterpriseusersaregenerallyshrinking.Thiscontrastswithseveralyearsago,whenuserswouldoftenover-commitandunder-utilizetheirleasedcapacity.Largerrequirementsareusuallyforhigh-performancecomputingneeds(HPC)andareoftendeployedatcost-efficientNorbasicN+1redundancies.
Enterpriseusersaregenerallyfocusedonthreethingsregardingleasedspace:
1)Contractflexibility,whichincludestheabilitytoeasilyincreaseordecreasetheirleasedcapacity,theabilitytolayerinmanagedservicessuchascloud,cybersecurity,etc.intotheirspend,ortore-distributeleasedcapacitytootherlocations/needswithinaprovider’sportfolio.
2)Proximityandaccesstocloudservices,includingdesignated“onramps”orcloudnodeswherelatencytoservicecriticalapplicationsiscritical.
3)Reliability,asthegrowingnumberofhigh-profiledatacenteroutagesthathavebeenprofiledinthenewsoverthepastyearcontinuetounderscorethebottom-lineriskforenterpriseusersowningandoperatingtheirowndatacenters.
CBRE’s2017U.S.Outlooknotedthedivergingneedsofthetwolargestusersofthird-partydatacenters—hyperscaleCSPusersandtraditionalenterpriseusers—andhowtheycouldpotentiallytransformdevelopmentandprovidertrendsinyearsahead.Demandfromenterpriseuserswillcontinuethisyear,astheyexecutetheirslow-and-steadymigrationofITworkloadstothecloudandthird-partyfacilities.Meanwhile,allindicatorsarethatrequirementsfromhyperscaleCSPuserswillsubstantiallyreturn,withseveralsizeabledealsrumoredtobeinthemarket.
What do hyperscale users want?
Hyperscaleusers—broadlydefinedasamulti-megawattuser,typically5+MWandlarger—arefocusedonthreeprimaryareas:
1)Geographicexpansionintomultiplenewmarketsorregions.
2)Businessandrevenueexpansion,andgrowthtoanticipateandmeetcustomerdemand,througheithercloudservicesorotherplatforms.
3)Theabilitytoscaleandaddcapacityquicklyandefficiently,withspeed-to-marketbeingapriority;strategyisfocusedonpower,spaceandcoolinginthemostcost-effectivemannertokeeppricinglow.
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U.S. DATA CENTER TRENDS REPORT H1 2017
Investmentinthedatacentersectorreachedafeverpitchinthefirsthalfof2017,totalingastaggering$18.2billionwhenincludingallsingle-asset,portfolioandentity-level/M&Atransactions.Thistotalisalreadymorethandoublethatforallof2016andisontrackforthis
year’sannualtotaltoeclipsethatofthepastthreeyearscombined.Overthepastfiveyears,morethan$45billionofinvestmentcapitalhasflowedintothedatacentersector,withmorethan50%ofthattotaloccurringsinceQ42015.
Investment / M&A
Buyer Location MarketSales Price ($ millions)
Type
Equinix Verizon portfolio (24 assets in U.S.) Multiple (15 markets) $3,600 Occupier/Operator
GI Partners KOMO Plaza Seattle $276 Investment
Carter Validus 250 Williams Street Atlanta $166 Investment
CentralColo Tysons Technology Center Northern Virginia $96 Occupier/Operator
Carter Validus 6 Norden Place (Norwalk) New York Tri-State $59 Investment
QTS 14100 Park Vista Boulevard (Fort Worth) Dallas/Fort Worth $50 Occupier/Operator
Carter Validus 400 Minuteman Road (Andover) Boston $37 Investment
H5 Data Centers Cleveland Technology Center Cleveland $31 Occupier/Operator
Ascent 4905 North Point Parkway (Alpharetta) Atlanta $30 Occupier/Operator
Lincoln Rackhouse 40 Perimeter Center East Atlanta $19 Investment
Carter Validus 1400 Cross Beam Drive Charlotte $16 Investment
Carter Validus 2601 West Broadway (Tempe) Phoenix $16 Investment
DataBank Stream Data Centers Dallas/Fort Worth undisclosed Occupier/Operator
Total $4,396
Buyer Acquisition Sales Price ($ millions)
Number of Data Centers
Digital Realty DuPont Fabros $7,600 12
BC Partners / Medina Capital (now Cyxtera Technologies) CenturyLink (data center portfolio) $2,800 57
Peak 10 ViaWest $1,675 24
Digital Bridge (consortium) Vantage Data Centers $1,200 7
CyrusOne Sentinel $500 3
Stonepeak Infrastructure Partners Cologix undisclosed 24
DataBank C7 Data Centers undisclosed 4
Chirisa Investors / Lumerity Capital / Longboat Advisors 365 Data Centers undisclosed 8
Total $13,775 139
Figure 7a: Data Center Asset Sales - YTD 2017
Figure 7b: Entity-Level Data Center Transactions - YTD 2017
Source: CBRE Research, H1 2017.
Source: CBRE Research, H1 2017.
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U.S. DATA CENTER TRENDS REPORT H1 2017
Threelargedealspushedinvestmenttotalsoverthetop,includingtwolargeacquisitionsthatwereannouncedinlate2016butofficiallyclosedbymidyear2017:
• Equinixacquireda29datacenterassetportfoliofromVerizonfor$3.6billion.Theportfoliospans15marketsandincludes24assetsintheU.S.,includingthestrategicallysignificantNetworkAccessPoint(NAP)oftheCapitalRegioninCulpepper,VAandtheNAPoftheAmericasinMiami.
• ApartnershipofBCPartnersandMedinaCapitalacquiredCenturyLink’sdatacenterbusinessfor$2.8billion,aportfolioof57datacenters.Thebuyersimmediatelylaunchedanewoperatingentity,nowknownasCyxteraTechnologies,withinitialplanshintingataddingnewcybersecurityservicesintotheirserviceoffering.
• DigitalRealtyTrustacquiredDuPontFabrosforanestimated$7.6billion,bolsteringDigital’salreadysizeablefootprintinkeycoremarkets,includingNorthernVirginia,ChicagoandSiliconValley.ThedealwassignedrightafterDuPontannouncedmorethan29MWinnewleasingfromaprominenthyperscaleCSP.
Othernotabletransactionsincludedretail/colocationproviderPeak10acquiringViaWestfor$1.7billionfromShawCommunications.Theportfolioof24datacentersgivesPeak10anationalfootprintandpotentiallypositionsitformorewholesale-likeofferings.AfteracquiringDataBankin2016,aconsortiumledbyDigitalBridgeacquiredVantageDataCentersfor$1.2billion,oneofthefewproviderswiththecurrentabilitytobringnewwholesalecapacityonlinelaterthisyearintheseverelysupply-constrainedSiliconValleymarket.
Thevolumeofindividualassetsalescontinuedtogaintractionaswell,withtransactionsevenlydividedbetweeninvestorsandowner/occupiers.Thisnumberisexpectedtoincreasethisyear,asthereareseverallegacycorporatedatacenterassetsbeingmarketedandreceivingstronginvestorinterest.Demandandpricinglevelsforthesetypesofcorporateassetshavehistoricallybeensporadicdependingonlocationandbuyerintent.Generally,dispositionswithvaryinglevelsofvacancyareviewedmorefavorablyinprimarymarketswith
strongend-userdemandandfavorablemarketfundamentals.Vacantcapacityinsecondaryortertiarymarkets,however,isoftentimeslessdesirable.Forassetswithamixtureofleasedandvacantcapacity,marketpricingvariesdramaticallybasedonthestrengthoflocalmarketdemand.Forthesepartiallyleasedassetsinsecondaryortertiarymarkets,strikingtherightbalancebetweenmaximizingthesalespriceandminimizingtherentalexposurecanbeadifficultbalancingact(seeCBRE’sQ4 2016 U.S. Data Center Trends report).
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Figure 8: Cumulative InvestmentEntity-LevelAsset/Portfolio Total
Source: CBRE Research, H1 2017.
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U.S. DATA CENTER TRENDS REPORT H1 2017
Things to WatchCloud vs. ColocationWilltherapidincreaseofenterprisecloudadoptionhelporhurtthecolocationmarket?Arefootprintsshrinkingorjustsettlingintoapatternofmoremeasured,strategicgrowthasdata-relatedcomputeandstorageneedswillonlycontinuetoexpandexponentially?
Infrastructure vs. The EdgeConnectivityandlatencyneedsarekeepingdatacenterdemandcenteredonprimarymarketsandatthe“edge”ofexisting,in-placenetworks;however,thenecessarygrowthofsecondaryandtertiarymarketswilllikelydependonsignificantinfrastructurebeingbuilt(fiber,power,etc.).Cangainskeeppacewiththedemandsoffuturenetwork-dependentapplications?
The Big Getting BiggerU.S.providershavehadsuccessfulinternationalexpansion,butwillinternationaloperatorscometotheU.S.andwilltheirmodelswork?Cannichecloudprovidersemergeandsucceedversushyperscalegiants?
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U.S. DATA CENTER TRENDS REPORT H1 2017
Pickingupmomentumfrom2016,Atlantaemergedasoneofthemostactivemarketsinthecountryinthefirsthalfof2017.Ahandfulofnewprovidersannouncedtheirentryintothemarket,whichoverthecourseofthenextseveralquarterscouldaddsignificantnewwholesalecapacitytothemetroarea.ThelargestprojectcomesfromSwitch,whichannounceditwouldinvest$2.5billioninDouglasCountytocreateaSoutheastcampusdubbed“TheKeep.”Othernewentrantsinclude:DataBankviaafacilityanchoredbyGeorgiaTech’sHPCresearchcenter(thefacilitywillbedesignedfor45kWperrackandbepartofthelargermixed-useCODAdevelopmentindowntownAtlanta)andAscent,whichacquiredasale-leasebackopportunityinAlpharettawiththeabilitytoeventuallyadd8MWofcapacityovertime.
NetabsorptioninH12017totaledroughly3MW,helpingpushthecity’sdatacentervacancyrate
downto9.2%atmidyearfrom11.4%inQ42016.Thecurrentconstructionpipelineremainsrelativelylowfornow,withonly7.5MWcurrentlyunderconstruction.Notably,DataSiteannouncedtheexpansionofitsAtlantafacilityby10,000sq.ft.and1MWofcapacity,withpotentialforanadditional2MWofcapacity.
Thedowntowncore’sinterconnectionmarketwasequallybusyinH1:CarterValidusMissionCriticalREITacquired250WilliamsStreet(alsoknownastheAmericanCancerSocietyCenter)for$166millioninQ2.ThebuildinghassignificantdatacentercapacityandDigitalRealtysubsequentlyannounceditwasleasing18,000sq.ft.ofraisedfloorinthebuildingwithafiberconnectionbacktoitsnearfully-leasedspaceatcarrierhotel56Marietta( justoverahalfmileaway).
Atlanta
Primary Market Insights
TheextremelylimitedamountofavailableexistingsupplyintheChicagowholesaledatacentermarketcontinuestoinfluencemarketdynamics,asthefirsthalfof2017sawonly4.2MWofnetabsorption.Withvirtuallynonewsupplybeingdeliveredsinceyear-end2016,thevacancyratedeclinedtoascant2.1%—thelowestintheU.S.amongprimarymarketsandrepresentinglessthan4MWofavailableexistingcapacity.
However,thisdoesn’tpaintacompletepictureofactivityinChicago.Severaldatacenteroperatorshaveanecdotallysharedtheyhavelostoutontransactionssimplybecausetheycouldnotdelivercapacityfastenough.Consequently,thelargestdatacenterlandlordsinthemarket—Digital
Realty,DuPontFabrosandCyrusOne—havebeenquicklyrampingupnewconstructiontomeetfuturerequirements.Therearecurrently40.8MWunderconstructioninChicagoamongthosethreelargeproviders,28.6MWofwhichisalreadypre-leasedtovarioustenants.
ThelargestnewfacilityunderwayisDuPontFabros’CH3facilityinElkGroveVillage.JustpriortoitsannouncedmergerwithDigitalRealty,theproviderrevealeda14.4MWleasetoahyperscaleuser,effectivelypre-leasingallofphaseIofCH3.Currentplansaretodeliverthe12.6MWphaseIIsimultaneously,withatargetcompletiondateof2018.
Chicago
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U.S. DATA CENTER TRENDS REPORT H1 2017
TheDallas/FortWorthmarkettotaledahealthy22MWofnetabsorptioninH12017,asmuchofthenewproductbeingdeliveredwasmetwithapent-updemand.Asaresult,thevacancyratedeclined3percentagepointsto16.8%atmidyear.Muchofthepreviouswholesaleavailabilitywaslocatedineitheraginglegacyassetsorsmallmegawatt-sizedpocketsthroughouttheMetroplexandsimplydidnotmatchthedemandprofilerequirementsinthemarket.It’sforthisreasonthatDallas/FortWorthhadlikelynotseenanabundanceofhyperscaleCSPleasingsimilartootherprimarymarketsofitssize;however,thereisevidenceofthattrendchanging.
WithCyrusOneandDigitalRealty—thetwolargestdatacenterlandlordsinthemarket—nearingfullcapacityattheirexistingcampuses,thesupplypipelineandthenear-termopportunitiesforotherprovidersremainsaprevailingstoryintheMetroplex.Therearecurrently10activemulti-tenantprojectsunderconstruction,totaling46.7MW.Thefirstphasesofallprojectsarebeingdeliveredonaspeculativebasis,indicativeofthe
strengthoftheDallas/FortWorthdemandpipeline.BothRagingWireandTierPointdeliveredcapacityinthefirsthalfoftheyear,andT5DataCentersispoisedtohave1.5MWcommissionedinthethirdquarterattheirnewfacilityinPlanowithmorethan70acresofexpansionpotentialatthesite.
TwonotableacquisitionsinH12017willalsoquicklyaddcapacityintheshort-term.DataBankacquireda145,000-sq.ft.poweredshellfromStreamDataCentersintheLegacybusinessparkinPlano.ThefacilitywillbeStreamDataCenters’thirdinDallas/FortWorthanditsfirstphasewilladd72,000sq.ft.ofraisedfloorinearly2018.QTSalsoacquireda260,000-sq.ft.datacentershellfromHealthCareServiceCorporation(HCSC),withleasingofanexisting40,000sq.ft.ofdatacenterspacealreadyunderwaytoendusers.Notably,thefacilityissituatedintheAllianceTexasmaster-plannedareanorthofFortWorth,whichispositioningitselfasafuturedestinationhubwithmorethan85acresidentifiedforfuturedatacenterdevelopment.
Dallas/Fort Worth
ThePhoenixdatacentermarketregisteredroughly3.8MWofpositivenetabsorptioninthefirsthalfof2017,althoughthistotaldoesn’treflectthenearly13MWofleasingactivityoverthesameperiod.AnumberofnewvacanciesatIODataCentersandDigitalRealtyTrustcontributedtonegativenetabsorptioninthe8-to-9-MWrangeinthefirstquarter,draggingdownnetoccupancygains.Asaresult,theoverallvacancyrateincreasedto8.8%atmidyear,upfromthealmostunsustainablylow3.1%inQ42016.
WhilePhoenixhasnotbeenimmunefromthesluggishpaceofhyperscaleCSPleasingaffectingotherprimarymarketsinH12017,providersaddingnewcapacitytothePhoenixmarketareseeingtraction.Mostnotably,CyrusOnedelivered9MWof
fully-leasedcapacityatitsChandlercampus,andhasadditionalpre-leasingofnewcapacitythatisslatedtodeliverlaterthisyear.AlignedDataCentershasalsoleasednearly3MW(60%)ofitsfirst5MWphase,withtheabilitytophaseinadditionalcapacityasneeded.
Arizona’spotentialasadestinationmarketremainsstrong.Severalprovidersandlarge-scaleuserscontinuetoexploreexpansionandmarketentryoptionsinvariouslocalesthroughoutthePhoenixmetroarea.Aninfluxofnewcompetitorsanddiversityofwholesalesupplyisgenerallyviewedasapositive.Arizona’sdatacenterincentivesprogramwilllikelyalsocontinuetobeanattractivedrawforfuturedemand.
Phoenix
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U.S. DATA CENTER TRENDS REPORT H1 2017
TheNorthernVirginiadatacentermarketcontinueditsrobustoutperformanceofotherprimarymarketsintheU.S.(andglobally),tallying41.5MWofoccupancygainsinthefirsthalfof2017.Thebulkofthisnetabsorptionwasfrompre-leasingthatoccurredlastyear,asprovidersbarelykeepaheadofdemandwithnewdeliveriesthatareconsistentlyeithersubstantiallyorfullypre-leased.ThelargestnetgainsinH12017absorptionwerebyDigitalRealty(+16.2MWinAshburnBuildingsJandH),DuPontFabros(+10.1MW)andCyrusOne(+6MW).
Thevacancyrateincreasedslightlyatmidyearto5.8%,butthisissimplyaresultofthepaceofnewsupplybeingadded,whichtotaled52.2MWinH1.Theprevailingvacancyraterepresentsjustover35MWofexistingavailablecapacity,essentiallylessthantwoquartersworthofabsorptionwhencomparedtothemostrecentthree-yearhistoricalaverageinthismarket.
TheamountofnewsupplyunderconstructioninNorthernVirginiacontinuestobeeye-popping,
effectivelydwarfingthetotalsofeventheclosestprimarymarket(currentlyDallas/FortWorth).Therearecurrently119MWspreadacross10differentprojectsactivelyunderdevelopment.Morethan67MWofthatcapacityisalreadypre-leased,likelyputtingtheNorthernVirginiamarketonpacetoreachorexceedtherecord-settingabsorptiontotalsofeachofthepasttwoyears.
Nearly76MWoftheexistingconstructionpipelinewilllikelybedeliveredinthesecondhalfof2017.ThelargestoftheseprojectsisCloudHQ’sMCC1datacenterinManassas,anchoredbya35MWtenantandwith8MWofspeculativecapacity.OtherdeliveriesexpectedlaterthisyearincludethefirstphaseofIronMountain’snewdatacenterinManassas,thefirstphaseCoreSite’sVA3inSterling,thefirstphaseofDigitalRealty’sBuildingLandsecondphaseofDuPontFabros’ACC9inAshburn.TheannouncedmergerofDigitalRealtyandDuPontFabroshasthepotentialforacombinedNorthernVAfootprintamongthetwoprovidersthatisfastapproaching400MW.
Northern Virginia
MarketactivityinSiliconValleyremainsrelativelyhandcuffedbyalimitednumberofavailablewholesaleoptionsandscantopportunitiesfortheadditionofnewsupply.Thevacancyrateremainednearitshistoricallowatmidyear,inchingupto5.3%from4.5%inQ42016andrepresentingonly9MWofexistingavailablewholesalecapacity.Morethan50%ofthisvacantcapacityisavailableinsecond-generationfacilitiesthataremorethanfiveyearsoldandoftenviewedastechnologicallyobsolescent.
Netabsorptiontotaled12MWinH1,nearlyallattributabletothedeliveryofCoreSite’sSV7facilityinSantaClara.Thefacilitywasanchoredbytwosubstantialpre-leasesandtheproviderhasformerlysaiditplannedtoreserveanadditional2MWofcapacitytooperateunderitsretail/colocationmodel.Asimilarpre-leasescenarioholdstruefortheremainingpipelineinSiliconValley:Thereare
currently29.5MWunderway;however,thatcapacityisalready100%committedtocustomers.ThenextavailablespeculativelybuiltnewcapacityisbeingdeliveredbyVantageDataCentersin2018.Vantageisstrategicallypositionedasoneofthefewoperatorstoaddnewwholesalecapacityinthenear-term.Inthemeantime,tenantslookingforwholesalespaceinthemarketmayberesignedtofuturesublet/re-letopportunitiesthatmaybeavailableinlate2017andinto2019.
ThebigheadlineinH1wastheacquisitionofVantageDataCentersbyaconsortiumledbyDigitalBridgeforanestimated$1.2billion.TheacquisitionincludesVantage’sexisting18-acrecampusandnine-acreexpansioninSantaClara,aswellasa68-acrecampus(withanexisting6MWfacility)inQuincy,WA.
Silicon Valley
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TheNewYorkTri-Statedatacentermarketcontinuestoexhibitpositive,albeitslow,momentuminitstransitionandrecoveryfromaseriesofsluggishyearsintheaftermathofSuperstormSandyin2012.Therewasroughly2.9MWofpositivenetabsorptioninH1,loweringwholesalevacancyto18.2%atmidyear.
Post-SuperstormSandy,marketdynamicshaveshiftedtosmallerretail/colocation-centricdeploymentsthathavebeenlargelydrivenbyriskmitigationconcernsfocusedondiversefacilitydeploymentsandgeographicdiversitywithintheregion.ThemostsignificantrecentmarketactivityhasbeenheavilycenteredonahandfulofM&AsthatunderscoretheshiftingdynamicsoftheTri-Statemarket:
• QTSRealtyTrustacquiredDuPontFabros’NewJerseydatacentercampusinPiscataway,N.J.lastyear.Theoperatorannouncedastrategicplantotargetsmallercolocationdealsandoffermanagedservicestolocalcompanies
lookingforsmallerpoints-of-presenceintheTri-Stateregion.ThisisinsharpcontrasttoDuPont’sstrategyoffocusingonlarger-scale,multi-megawattdeals.
• Earlythisyear,traditionalwholesaleproviderCyrusOneacquiredSentinelDataCenters,whoseSomerset,N.J.facilityhas140,000sq.ft.ofraisedfloorspacewiththecapacitytoaddanadditional15-to-20MWofwholesalecapacity.CyrusOneenteredtheTri-Stateregionin2015withitsacquisitionofcolocationproviderCervalis,withfourfacilitiestotaling125,000sq.ft.ofheavilyretail-centricoperatingspace.
MarketgrowthisbeginningtooccurnorthofManhattan,particularlyinConnecticutandOrangeburg,N.Y.InterestinthesenewsubmarketsisbeingdrivenbyincreasingdemandforbusinesscontinuityanddisasterrecoveryinareasthatofferbothgeographicandutilityproviderdiversitytoNewYorkandNewJersey.
New York Tri-State Region
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TheMinneapolis/St.Paulmarketformulti-tenantdatacenterscontinueditsrapidgrowthin2017.Marketdemandforthird-partydatacenterspacehasbeenatunprecedentedlevelssincemid-2015,whenanumberofnewprovidersandfacilitiesenteredthemarket.Demandhasremainedstrong,with3.2MWofnetabsorptioninthefirsthalfof2017—onpacetomeetorexceedrecentannualtotalsof6MW.
Whiletheexistingsupplyofavailablewholesaleandcolocationspaceremainsrelativelyhighdespitethesignificantabsorptionlevelsofthepastseveralyears,thisislargelyduetothecompletionofadditionalnewpods/phaseswithinexistingbuildings.Nearlyalloftheprovidersthatdeliverednewdevelopmentprojectstothemarketin2015-16areexpandingcapacitytokeepupwiththesteadydemand.Therearecurrently5.4MWactivelyunderconstructioninthemetroarea,withanadditional16.7MWplanned.
However,Minneapoliswillremainatenantfavorablemarketinthenear-termandendusersleasingdatacenterspacewillcontinuetohavesignificantleveragethrough2018untilabsorptionfurthercatchesupwithsupply.Untilthen,downwardpressureonpricingandincreasedconcessionsfromthird-partyproviderswillcontinuetobethenorminthismarket.
Themarketforthird-partydatacenterspaceinMinneapolis/St.Paulcontinuestoevolve,withmanycompaniesnowchoosingtoleaseasopposedtobuild,evenforsingle-tenantsolutions.Minnesota’sdatacentertaxincentiveprogramhashelpeddrivethird-partydemand,providingcompanieswithanabatementorrebateofsalestaxonsoftware,hardwareandpowerovera20-yearperiod.Anestimated$100millionhasbeenrebatedtodate.
Secondary & Emerging Market Highlights
Minneapolis
Atlanta
Primary Market Insights
ActivityintheBostondatacentermarketremainssubdued,asthehighcostofpower,elevatedtaxratesandlackofdatacenterincentivescontinuedtolimitdemand.Themarketregisteredapproximately1MWofnetabsorptioninH1,primarilybyusersfromthefinancialservices,e-commerceandtechnologyindustries.Leasesinthefirsthalfoftheyearaveragedapproximately150kW.Vacancystandsat24.4%forwholesaleproduct.
DevelopmentintheBostonmetroisevenlysplitbetweenCoreSiteandMarkley.CoreSitewilldeliver1.2MWover12,000sq.ft.ofraisedfloorinQ42017atitsSomervillesite.Markleywillalsodeliver1.2MWover12,000sq.ft.ofraisedfloorinLowell.Neitheroftheseprojectshasrecordedanypre-leasing.
Boston
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TheCharlotteandRaleigh-Durhamareaisasignificantemergingdatacentermarket.OverallexistingcapacityinNorthCarolinahasincreasednearly19%since2016andcurrentlystandsat50.9MW.Positivenetabsorptionofnearly10.5MWsincethen(6.4MWinRaleighand4.1MWinCharlotte)representsanearly40%increaseintotaloccupieddatacenterspace.Whilethecurrentvacancyrateseemselevatedonthesurface(29.5%),itrepresentsonly15MWofexistingavailablecapacity.
Previouslybifurcatedintotwodistinctsegments—singletenant/owner-occupieddatacenterhubsandsmallretail/colocationfacilitiesdrivenbylocalhealthcareandfinancialservicesrequirements—themarketistransitioningintoaviablenationalmulti-tenantleasingdestinationcenter.
Recentacquisitionactivityunderscoresthechangingnatureofthemarket.Charlotte-basedPeak10—thelargestretail/colocationproviderinNorthCarolina—announcedinJunethatitwas
acquiringnationalretailoperatorViaWestfromShawCommunicationsfor$1.68billion.TheacquisitionissignificantinthatitexpandsPeak10’sfootprintfromregionaltonational,addinglocationsinMinneapolis,Dallas,Denver,SaltLakeCity,LasVegas,PhoenixandPortland.NationalwholesaleoperatorCyrusOnealsoenteredtheNorthCarolinamarketthisyearwithitsacquisitionofSentinelDataCentersfor$490million.ItsNC-1facilityintheResearchTriangleParkinRaleigh-Durhamhasapotentialbuildoutof200,000operationalsq.ft.androughly23MWofcriticalITload.
AsidefromtheCharlottearea’scentralEastCoastlocationandabundanceoflow-costlandavailablefordevelopment,severalothercontributingfactors—low-costpower,attractivedatacenterincentivesandDukeEnergy’sinvestmentinrenewableenergy—willlikelymakeNorthCarolinaanattractivedestinationforbothnationalandregionalenterprisedatacenterrequirements.
North Carolina
TheHoustondatacentermarketremainsrelativelystalled,withonlyminimalactivityandnodealsofsignificantsizeoccurringinthefirsthalfof2017.Vacancyamongwholesaleproductstandsat21.4%andretail/colocationinventoryremainsanestimated30+%vacant.Currentdemandinthemarketiscomprisedofusersfromthetransportationandhealthcaresectors,reflectiveofthelocalpullbackintheenergy,financialservicesandtechnologysectors.
DevelopmentinHoustoniscurrentlylimited,withTRG’s3MW,10,000-sq.-ft.facilityinSpring,TXcurrentlytheonlyprojectactivelyunderconstruction.Theprojectisexpectedtobecompletedlaterthisyear.PendingprojectsincludeStreamDataCenters’additional4.8MWinplannedcriticalloadforitsthirdandfinal10,000-sq.-ft.podandCyrusOne’s209,000-sq.ft.poweredshellatitsWestIIIfacility,whereithasalreadybuiltapproximately5MWover52,932sq.ft.ofraisedfloor.
Houston
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TheAustinandSanAntoniomarketsremainrelativelysluggish,withnosignificantleasingdealsoccurringinthefirsthalfof2017.Therearecurrently15MWofexistingdatacentercapacityavailablealongtheInterstate35corridor,representingavacancyrateof15.3%.Thesetwomarketsarebifurcatedalongdemandsegments,withSanAntoniodrivenbylargewholesaleandenterprisedeploymentsandAustin’sdemandderivedfromsmaller,localizedretail/colocationrequirements.Austin,inparticular,isoneofthestrongestandfastest-growingtechsectormarketsinthecountry,withanumberofSiliconValleyfirmsmigratingtothemetroareatoescapethehighcostoftheBayArea.
Despitetheoveralllackofactivity,thedevelopmentpipelineisactive.InSanAntonio,CyrusOnecompleteditsfullypre-leased,24-MWSanAntonioIIIfacilityearlierthisyear,andiscurrentlyconstructingits60,000-sq.-ft.,12-MWSanAntonioIVdatacenter.InAustin,CyrusOneplanstobuildoutitsAustinIIIfacility,whichiscurrentlyasingle-story,retrofitfacilityoffering9MWofcriticalloadover67,000sq.ft.ofraisedfloorandiscurrently19%occupied.Atfullbuildout,AustinIIIwillhouse18MWofcriticalloadand128,838sq.ft.ofraisedfloor.FollowingthesuccessofitsexistingAustinfacility,DataFoundryisplanningasecondfacilitywith165,000sq.ft.ofraisedfloorand16.5MWofcriticalpower.
Austin/San Antonio
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Columbusisanemergingdatacentermarketwithsignificantmomentum.Inthepast10years,themarkethasevolvedfromalocationofchoiceformanycorporateenterprisedatacenterstooneoftheworld’stoplocationsforInternetcloudoperations.Columbushasnowgainedtheattentionofnationalcolocationdatacenteroperators.Itsreliablepowerandrobustdatafibernetwork,itsgeographicproximitytoabouthalfoftheU.S.populationandtheresultinglowerlatency,anditspro-businessenvironmentwithafavorabletaxclimateisbolsteringColumbus’standingasoneofthehottestdatacentermarketsinthecountry.
ColumbusisstrategicallylocatedinoneofthehighestconcentrationareasofdatatransmissionandstorageintheU.S.,effectivelyservingasanon-ramptolong-haultransmissionnetworks.
HyperscaleCSPsandcontentprovidersaremovingtothe“Edge”toprovidefasterdownloadsoflargeamountsofcontentandtheColumbusregionhasbecomeasignificantfocalpoint.
ThecolocationdatacentermarketinColumbusisstillevolving.CologixandExpedientrecentlydevelopedTierIII-typefacilitiesthatareconcurrentlymaintainable.CologixacquiredthecolocationdatacenterbusinessandtherealestateofDatacenterBZin2014,andwillsoondelivera160,000-sq.ft.,12MWcolocationdatacentertoitscampus.ExpedientconstructedPhaseIofa60,000-sq.ft.colocationdatacenterin2015.Thisnewdevelopmentactivityrepresentsapositivedirection,butthereisstillagrowingneedforwholesaledatacenteroptionsinColumbus.
Market to Watch: Columbus
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Pat LynchSenior Managing DirectorData Center Solutions
Spencer G. LevyHead of Research and Senior Economic Advisor Americas
[email protected]:@SpencerGLevy
Jeff WestDirector of Research & AnalysisData Center Solutions
[email protected]:@JeffWestCBRE
Jeremy MeyersBusiness Development ManagerData Center Solutions
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U.S. DATA CENTER TRENDS REPORT H1 2017
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