North America Data Center Trends H1 2022

• Supply in primary markets increased by 352.9 MW, or 10.5%, in H1 2022, contributing to a 20% year-over-year increase of 627.3 MW.
• The construction pipeline within primary markets more than doubled year-over-year to 1,601.5 MW.
• Northern Virginia’s under-construction total increased by 188% year-over-year to 837 MW, 76% of which is already preleased largely by hyperscalers.
• Average rental rates increased for the first time since 2017, up by 5.9% to $127.50 per kW/month for a 250- to 500-kW requirement, across primary wholesale colocation markets. Secondary market average rents increased by 2.3% from H2 2021 to $133.00 per kW/month for a 250- to 500-kW requirement.
• Net absorption across primary markets nearly tripled year-over-year to 453.4 MW, mainly driven by large hyperscalers.
• Vacancy rates fell from a year ago in all seven primary markets. Silicon Valley had the lowest at just 1.3%.

Figure 1: H1 2022 Wholesale Primary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H1 2022 and H1 2021. **Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements.
Source: CBRE Research, CBRE Data Center Solutions, H1 2022.

Figure 2: H1 2022 Wholesale Secondary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H1 2022 and H1 2021. **Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements.
Source: CBRE Research, CBRE Data Center Solutions, H1 2022.

• Providers brought 352.9 MW of new wholesale colocation supply online across primary markets in H1 2022, up 10.5% from H2 2021’s tally.
• Atlanta saw the highest percentage growth (40%) among primary markets, adding 71.7 MW of new inventory.
• Northern Virginia added 219.5 MW of new supply in H1 2022 and had another 837 MW under construction, 76% of which is already preleased.
• Phoenix and New York Tri-State delivered 37.5 MW and 16.9 MW of new supply, respectively, in H1.
• New York Tri-State’s construction pipeline nearly doubled in H1, largely by major providers Data Bank and QTS. Just 4.9 MW (7.3%) had been preleased.
• Hillsboro, OR saw the largest supply increase among secondary markets, up by 27% to 139.4 MW, driven by requirements from large social media companies.
• Seventy-three percent of the 1,601.5 MW of under-construction capacity across primary markets in H1 was already preleased. Dallas led all markets with a 90% preleased rate.
• Montreal had no supply growth in H1 2022, and its under-construction total was unchanged at 69.0 MW.
  
  

Figure 3: Inventory Growth of Primary Data Center Markets since 2015

Source: CBRE Research, CBRE Data Center Solutions, H1 2022.

Figure 4: Primary Markets Historic Net Absorption, Preleasing & Under Construction

Source: CBRE Research, CBRE Data Center Solutions, H1 2022.

Figure 5: Net Absorption vs. Under Construction by Primary Market, H1 2022

Source: CBRE Research, CBRE Data Center Solutions, H1 2022.

Figure 6: Net Absorption vs. Under Construction by Secondary Market, H1 2022

Source: CBRE Research, CBRE Data Center Solutions, H1 2022.

• Net absorption across primary markets nearly tripled year-over-year in H1 to 453.4 MW as large hyperscalers procured cloud capacity for long-term growth.
• Northern Virginia recorded 269.3 MW of net absorption in H1 2022—nearly four times the amount of a year ago. Silicon Valley had the second-highest total of 56.2 MW.
• Dallas recorded 25.9 MW of net absorption in H1, up from just 3.7 MW in H1 2021.
• Secondary markets recorded 62.6 MW of net absorption, nearly double the amount of a year ago. These markets are attracting more users as available space and power supply in primary markets tightens.
• Among secondary markets, Hillsboro, OR recorded the most net absorption in H1 totaling 37 MW, largely from increased demand by social media companies.
• While demand is being driven largely by hyperscalers, enterprise users are becoming more active in certain markets like Silicon Valley.
• An increase in edge deployments, driven by AI, 5G and blockchain technologies, was fueled by providers opening smaller facilities in secondary markets.

• The average monthly asking rate for a 250- to 500-kW requirement across primary markets increased by 5.9% year-over-year to $127.50 per kW.
• Supply chain disruptions are causing delays in new construction deliveries. Securing critical data center equipment like network switches can take a year or more, further exacerbating the supply/demand imbalance and leading to increased pricing.
  
  

Figure 7: Average Asking Rental Rate with Y-o-Y % Change for Primary Markets

Source: CBRE Research, CBRE Data Center Solutions, H1 2022.

• New supply levels have not kept pace with rising demand, putting a rental rate premium on any available space.
• Key markets such as Northern Virginia and Silicon Valley are struggling to quickly fulfill power requirements for new projects. Northern Virginia is seeing robust demand for new transmission lines and substations. In Silicon Valley, the city of Santa Clara has virtually no additional power to deliver. These limitations are making it harder to deliver new supply, which is driving up pricing for existing facilities.
  
  

Figure 8: Average Asking Rental Rates Primary vs. Secondary Markets

Source: CBRE Research, CBRE Data Center Solutions, H1 2022.

Record-high investor and tenant demand, along with record-low capitalization rates, portended a banner year for data center investment in early 2022, highlighted by KKR’s $15 billion acquisition of CyrusOne. That all changed by midyear, as rising interest rates and inflation led to a period of price discovery and limited offerings by sellers.

Notable H2 2021 investment activity included:

• KKR and Global Infrastructure Partners’ acquisition of CyrusOne for $15 billion.
• Stonepeak’s $3 billion equity recapitalization of Cologix.
• DigitalBridge’s $1.2 billion partial recapitalization of DataBank.
• DataBank’s acquisition of four CyrusOne data centers for $670 million.
• Cloud Capital’s acquisition of COPT’s DC-6 data center for $222.5 million.

Continued strong hyperscale demand is expected to fuel an uptick in partial interest trades and forward sales of new construction. In addition, rising interest rates likely will create sale-leaseback opportunities for enterprises eager to raise capital.

Investors remained focused on top-tier data centers, particularly those with strong tenancy, significant remaining lease term and ability to meet customer demand for the right connectivity, cloud on-ramps and density. This should continue in light of the rising inflation and interest rate environment.

Limited sales activity made it difficult to determine average cap rate movement and the impact of rising interest rates and inflation on asset pricing in H1.

Supply chain disruption, inflation and supply-and-demand dynamics are impacting rental rate and concessions underwriting assumptions, with increases in non-recurring costs and rental rates in certain markets.

Vacant and second-generation enterprise data center valuations remain increasingly difficult to underwrite. Physical characteristics and market fundamentals at the time of sale are increasingly more important, especially considering speed-to-market and power availability impacts. Enterprise facilities built for a specific use, with limited consideration for their second-generation market appeal, are often trading at a significant discount to replacement cost. Those assets with higher capacity or fiber-rich networks can limit the discount to replacement cost.

The Rise of XaaS

"Everything as a Service" (XaaS) demand grew by 42% year-over-year in H1 2022.¹ This record H1 growth rate is largely from the continued utilization of hybrid work models that generally require a host of cloud-based tools and technologies.

Strong demand for "Software as a Service" (SaaS) applications is expected to continue as more companies rely on virtual collaboration and work-from-anywhere models. A 2021 survey found that companies were utilizing more than 100 different SaaS applications on average, a 38% increase from 2020.²

The surge in XaaS has impacted data storage and connectivity requirements. With more companies using programs like Salesforce and Zoom, the amount of data being created, consumed and stored has increased exponentially. Connectivity requirements are becoming increasingly important. If services rely on an internet-enabled network, users may be unable to access them if their internet connection is interrupted. Latency and bandwidth have become even more important as end-users require faster access to larger amounts of data from more places. Consequently, we continue to see significant investment in edge data centers, which help to reduce latency and optimize bandwidth by bringing data closer to end users and devices.

Security Concerns

Dispersed workforces and increased consumption of cloud-based software, platforms and infrastructure have heightened the importance of data security. As workforces shift to a borderless environment, vulnerabilities have naturally increased. As a result, spending on data security grew by 40% year-over-year in Q1 to more than $800 million, contributing to 30% growth in total "Secure Access Service Edge" (SASE) revenue of nearly $1.5 billion.³

¹Demand for IT, Business Services in the Americas Remains Strong, Information Services Group, July 19, 2022.
²State of SaaS Ops, Better Cloud, May 2021.
³SASE’s Security Services Edge Market Heats Up 40 Percent in 1Q 2022, Dell’Oro Group, June 29, 2022.

• Prices are expected to continue rising in H2 due to increased land pricing and lack of land availability.
• Migration to secondary and tertiary markets will continue as limited space and power availability threaten to increase costs in supply-constrained primary markets.
• More 100+MW leases will be signed, as the shift to adoption of cloud computing continues.
• Delivery of future supply may be slowed by supply chain disruptions and lack of power and land availability in major markets like Northern Virginia and Silicon Valley.
• Sustainability will remain a top priority for data center providers in H2 2022 to meet any new environmental requirements.