by Brianna Crandall — February 19, 2018 — Despite record-setting wholesale absorption levels for three consecutive years, ever-increasing data consumption and the rapid evolution of technology will fuel strong demand for data center space in 2018, according to global commercial real estate services and investment firm CBRE Group’s 2018 U.S. Real Estate Market Outlook.
Pat Lynch, senior managing director, Data Center Solutions, CBRE, stated:
From self-driving vehicles, to networked homes, to advancements in mobile, interconnectivity and content delivery, demand for data consumption, storage and compute power will not abate any time soon. Investors should focus on primary data center markets such as Northern Virginia, Chicago and Dallas, as well as secondary markets where emerging opportunities exist, including Reno, Minneapolis and Denver.
Cloud adoption
The rapid adoption of cloud solutions has bifurcated demand from traditional enterprise end-users and hyperscale cloud service providers (CSPs), according to the report. Enterprise end-users (financial services, insurance, retail companies, etc.) are migrating from owning and operating their own facilities to a hybrid mix of third-party colocation and the cloud.
Jeff West, Americas head of Data Center Research, CBRE, remarked:
To keep up with cloud-adoption demand, hyperscale CSPs will focus on cost-competitive and flexible solutions. Their need to expand quickly and in multiple markets will fuel their own builds as well as their deployments with third-party data center operators.
M&A/Investment
According to the report, capital flowing into the data center space exploded in 2017, with many new investors and operators, such as private equity firms, entering the space. Total US investment volume approached $20 billion for the year, a record level.
While investor demand will be robust in 2018, the lack of opportunities and the intricacies of data center assets — particularly value-add and single- to multi-tenant conversions — may curtail the record-setting volume of 2017.
New supply
CBRE expects nearly 300 megawatts of data center space to be completed in the primary data center markets it tracks in 2018.
CBRE does not foresee any risk of oversupply, since key markets like Chicago, Northern Virginia and Silicon Valley have vacancy rates near or below five percent. Furthermore, pre-leasing levels are high, with nearly 50 percent of the oncoming capacity already spoken for.
West added:
Looking ahead, the data center sector could see a shift toward increased speculative development. Potential tenants are more willing to share expansion goals and needs with operators and, anecdotally, data center providers have lamented missing opportunities due to their inability to deliver product in the necessary timeframes.
The report forecasts market performance in the year ahead for all major commercial real estate sectors. It explores not only supply and demand, but certain macro factors such as tax reform, infrastructure spending, immigration policy, health care policy, business spending and investment, among others. Sectors studied include: Capital Markets, Office, Occupier, Industrial & Logistics, Retail, Multifamily, Hotel, Data Centers, Life Sciences, Medical Office and Seniors Housing.
CBRE’s 2018 U.S. Real Estate Market Outlook is available to download from the firm’s Web site upon brief registration.
