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New remote reality drives spike in data center development

Driven by continuing demand from the financial sector, Fortune 500 companies and significant increase in remote working due to COVID-19, the New York Tri-State region saw an increase in new data center development as vacancy rates dropped to 9.1 percent, their lowest levels in years in H1 2020, according to CBRE’s latest North American Data Center Trends Report.

The New York Tri-State region saw just 1.1 megawatts (MW) of net absorption in H1 2020 due to the shortage of available capacity, down from 5.3 MW during the same period a year earlier.

In response, the market has 22.2 MW of new construction underway, representing an increase of nearly 15 percent of the total current inventory of 151.3 MW.

Most transactions in the New York Tri-State region are still driven by financial companies focusing on high-performance computing and expansion.

JOHN MEISEL

“Digital Realty, the most active operator in the region, is capacity constrained in New Jersey and will soon begin construction on a new 600,000 s/f campus in Totowa, with the first building expected to be delivered in Q1 2022,” said Jon Meisel, Senior Vice President for CBRE’s Data Center Solutions Group.

“The previously quiet Totowa colocation market will likely see an additional uptick in activity over the next two years.”

CBRE First Vice President William Hassan added, “The dramatic increase in remote working has reinforced the importance of data centers and the networks that support them, and we expect this trend to continue. Capital market activity should remain brisk with the monetization of enterprise-owned sites and a few net leased assets.”

National Trends

The North American data center sector was resilient in the first half of 2020 as many businesses implemented hybrid IT infrastructure to improve their remote work capabilities and streaming content providers saw increased viewership due to the COVID-19 pandemic.

The seven primary U.S. data center markets saw 134.9 megawatts (MW) of net absorption in H1 2020—down from record levels in the first halves of 2019 and 2018, but still higher than the same period in 2017 and 2016. The vacancy rate in the primary markets dropped 70 basis points year-over-year to 10.3 percent despite a 5 percent growth in inventory during H1. The decline in net absorption in H1 2020 was largely due to increased supply.

“The economic slowdown will force companies to scrutinize every dollar of their IT spending, but continued investment in mission-critical IT infrastructure like data centers and cloud services will be imperative to supporting business continuity and remote working,” said Pat Lynch, Senior Managing Director, Data Center Solutions, CBRE.

PAT LYNCH

“The outperformance of data center REITs compared to other public real estate securities so far in 2020 has brought new investor interest to the sector, which will likely result in increased development activity.”

Top North American Data Center Markets

Northern Virginia remained the most active data center market, with net absorption of 93.2 MW in H1 2020.  

Strong demand over the past several years has resulted in a 373.6-MW data center construction pipeline in the primary markets, a third of which has been pre-leased. Northern Virginia accounts for 64 percent (239 MW) of the construction pipeline in the primary markets.

Other markets with significant construction pipelines include Montreal (55 MW), Central Washington (43.7 MW), Atlanta (28.5 MW) and Phoenix (28.1 MW).

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