With virtualization on the deck and IT moving towards cloud, data centers business is motivating the market. Latest report asserts that among 15 major data center markets in the U.S., nine were seeing at least 30 percent of user demand stemming from cloud computing.
In its report, a new report from commercial real services company JLL writes, U.S., cloud-related demand was especially strong in Chicago, Austin-San Antonio, Texas, Northern Virginia and Northern California.
Bo Bond, managing director at JLL and co-leader of its data center group, says space absorption by multi-tenant data centers was down a little during the first half of 2017, in the wake of record-level absorption in 2016.
Last year, U.S. data centers witnessed 350 megawatts of absorption, the JLL report notes. In the data center market, absorption is measured by power generation rather than square footage. U.S. markets absorbed 182.1 megawatts in the first half of this year, compared with 249.1 megawatts during the same period in 2016.
For data centers, 2016 was “an absolute frontier,” Bond says. “It turned the industry on its end. We’ve seen an unbelievable amount of supply have to come on-line to catch up with demand.”
Compared with 2016, JLL researchers say, a drop-off in absorption this year shouldn’t be interpreted as a sign of weakness in cloud-oriented demand for data centers. Users are still clamoring for cloud-based services, while Amazon Web Services and Microsoft Azure are still sifting through the data center inventory they added last year.
“We still have a long way to go before we get to saturation,” says Alen Lin, senior director at Fitch Ratings, a credit-rating service. “You have the tailwinds pushing and propelling this industry forward.”
Today, the construction pipelines for publicly-traded REITs specializing in multi-tenant data centers are quite large, thanks in large part to cloud computing, says Bond.
Data centers form the backbone of the digital economy. These industrial-style buildings contain computer servers and other IT equipment that gather, process and store data for an array of users. Growth in the data center market comes against the backdrop of substantial M&A activity in the data center industry.
In early August, for instance, Peak 10 completed its $1.7 billion acquisition of ViaWest. The new company, called Peak 10 + ViaWest, now controls 40 data centers covering 2.7 million sq. ft. An even bigger deal is pending. Data center landlords Digital Realty and DuPont Faros Technology are merging in a $7.6 billion transaction. The combined company will run nearly 170 data centers, mostly in the U.S., encompassing approximately 28 million sq. ft.
In a June report, Cohen & Steers, an investment manager with hefty stakes in two data center REITs, noted that data center operators have been among the top REIT performers, with better-than-expected bumps in leasing volume in the first quarter of 2017. The report notes that demand for data center services is outstripping supply, with growth prospects remaining “solid.”
Rapid growth in data consumption “almost guarantees” opportunities for commercial real estate professionals, Boyd says, but the “sweet spots” for development can vary in terms of location. Although the typical focus is on data centers in top-tier locations, Lin points out that second- and third-tier markets are also viable options for data center development.