North America Data Center Trends H2 2021

• Primary market supply grew 8.9% half-over-half and 17% year-over-year in 2021 to 3,358.1 MW.
• Cloud service providers and social media companies were responsible for the bulk of leasing activity in 2021, particularly in Northern Virginia, Hillsboro, Atlanta, Phoenix, Chicago and Dallas.
• Rental rates held steady in H2 2021. Compared with year-end 2020, the average asking price decreased by 0.4% to$120 per kW/month across primary wholesale colocation markets for a 250- to 500-kW requirement. Secondary markets fell an average of $3 per kW/month, or 2% from H2 2020. Faced with limited supply and rising demand, particularly in low-vacancy markets like Silicon Valley, asking rates are expected to increase in 2022.
• Secondary U.S. markets saw 21.6 MW of positive net absorption in H2 2021, down 11.1 MW (33.9%) from the 32.7 MW of positive absorption in H1 2021. For full-year 2021, absorption fell by 2.2% year-over-year in secondary markets to 54.3 MW. Several large leases were vacated, causing negative absorption and reducing the second-half totals for certain secondary markets.
• Hillsboro posted the highest absorption total in H2 2021 (6.6 MW) among secondary markets, continuing a trend from the first half of the year. Two large social media companies were responsible for this spike in absorption, signing multiple leases in the area. Hillsboro’s economic incentives, favorable climate, bountiful clean power and geography all contributed to the rapid growth of the market in 2021, as well as the large amount of preleasing going into 2022 (199.0 MW).
• Land and power constraints continue to affect markets like Northern Virginia and Silicon Valley, with vacancy rates of 5.1% and 1.6%, respectively. Headwinds facing Northern Virginia are due to substation delivery delays, not inability to generate enough power. Silicon Valley faces both delivery-side and generation-side power issues. This may pose challenges to new development in an already supply-constrained market. Both markets anticipate more vertical, multi-story construction of data centers to account for limited developable land in necessary districts.

Figure 1: H2 2021 Wholesale Primary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H2 2021 and H2 2020.
**Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements. Source: CBRE Research, CBRE Data Center Solutions, H2 2021.

Figure 2: H2 2021 Wholesale Secondary Market Fundamentals

*Vacancy Y-o-Y changes are calculated by comparing the difference between H2 2021 and H2 2020.
**Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements. Source: CBRE Research, CBRE Data Center Solutions, H2 2021.

• Total inventory across primary markets grew by 17%year-over-year to 3,358.1 MW.
• Atlanta saw the highest percentage growth among primary markets, adding 51.7 MW of new inventory in the second half of 2021, up 29% from H1 2021. This was largely due to a large hyperscale company signing multiple MW deals in the area with QTS.
• Northern Virginia remained the world’s largest data center market and added 185.1 MW of new supply in H2 2021. Northern Virginia has 239 MW of wholesale colocation capacity under construction, 100 MW of which is preleased. New supply that came online in 2021 was almost equal to the market’s total absorption amount.
• Phoenix and Silicon Valley saw significant development activity, delivering 19.5 MW and 10.5 MW, respectively, of new supply in H2 2021.
• Hillsboro continues to see an increase in future supply, driven by requirements from large social media companies. The market’s construction pipeline grew by 172.9 MW (279.3%) to 234.8 MW in H2 2021, an increase of 194.4 MW (480.5%) compared with 2020. The under-construction total will more than triple Hillsboro's total inventory, which currently stands at 109.4 MW, and is currently nearly 85% preleased.
• Primary markets, many with single-digit vacancy rates, are seeing more speculative developments break ground, with 321.7 MW of the 727.6 MW (44.2%) of under-construction capacity preleased.
• Secondary markets have higher preleasing percentages, with 318.3 (76.3%) of the 416.8 MW of current construction capacity preleased, limiting future supply for new entrants to the market. This is largely due to the leasing activity in Hillsboro, as well as increased construction volume in Houston in H2 2021 (46.0 MW). The trend of higher preleasing percentages is expected to continue as large companies sign deals for larger data center requirements in markets with more affordable land and power costs.
• Inventories in Montreal and Toronto remained unchanged in H2 2021, though they have 69.0 MW and 40.0 MW, respectively, under construction. This new construction is largely due to cloud service providers growing their presence in the Canadian markets. Montreal’s construction pipeline remained the same from H1, while Toronto’s grew by 35.0 MW in H2 2021. Future supply in Montreal is 23.2% preleased, while Toronto is 77.5% preleased.
• Denver and Southern California also have increased construction pipelines from H1 2021. Denver’s pipeline grew by 366.7% to 10.5 MW, none of which is preleased. Southern California's pipeline grew by 122.4% to 14.9 MW, 100% of which is preleased. The growth of secondary markets will continue as providers look to markets with optimal qualities for data center development.

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

Source: CBRE Research, CBRE Data Center Solutions, H2 2021.

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

Source: CBRE Research, CBRE Data Center Solutions, H2 2021.

• Cumulative net absorption across primary markets in H2 2021 totaled 351.7 MW, up 158.5 MW year-over-year.
• Northern Virginia recorded 232.73 MW of positive net absorption in H2 2021, more than four times Atlanta, which was the second most-active market with 55.5 MW of positive net absorption. Northern Virginia’s year-end absorption increased 86.1 MW year-over-year.
• Despite having a large construction pipeline, Hillsboro's future supply is mostly spoken for, with 85% of the 234.8 MW already preleased. The bulk of the new construction is one facility, with the entire capacity going to one social media company. Several social media companies have absorbed, or plan to absorb, space in the Pacific Northwest city in 2022 and beyond.

The adoption of emerging smart technologies, growing requirements by social media companies and cloud utilization continue to drive market activity across primary and secondary North American markets.

Figure 5: Net Absorption vs. Under Construction by Primary Market, 2021

Source: CBRE Research, CBRE Data Center Solutions, H2 2021.

• Secondary markets recorded 21.6 MW of positive net absorption in H2 2021, down 33.9% from 32.7 MW in H1 2021. For the full year, absorption totaled 54.3 MW, 1.3 MW less than the 55.6 MW in 2020. Despite increased activity, several large properties were vacated, causing negative absorption and bringing down the second-half totals for certain secondary markets. Secondary market activity is expected to grow with providers moving out of low-vacancy, expensive primary markets into more affordable secondary and tertiary markets with more land and power availability.
• An uptick in requirements by social media companies accounted for the bulk of the increased preleased space in both primary and secondary markets.
• Providers continue to determine future changes in demand opportunities, driven by emerging technologies, 5G, AI, increased requirements from social media giants and the rise of virtual reality communities like the metaverse.
• Dallas has recently seen increased demand as tenants signed leases that will absorb in early 2022. The market has 55.5 MW of preleased capacity, accounting for 73.3% of their 75.8 MW construction pipeline.

Figure 6: Net Absorption vs Under Construction by Secondary Market, 2021

Source: CBRE Research, CBRE Data Center Solutions, H2 2021.

Secondary markets recorded 21.6 MW of positive net absorption in H2 2021, down 33.9% from H1 2021. For the full year, absorption totaled 54.3 MW, 1.3 MW less than the 55.6 MW in 2020.

• Wholesale colocation asking rates for typical N+1/Tier III requirements in primary markets dipped 0.4% in 2021, mostly in H1. The average asking rate for a 250- to 500-kW requirement across primary markets was approximately $120 kW/month. By contrast, the average asking rate was $136 kW/month five years ago.
• Pricing has declined year-over-year across the U.S. but stabilized in key markets in 2021 and in some cases began to increase. Tenants looking to renew leases are hoping to do so quickly to lock in lower rates.

Pricing has declined year-over-year across the U.S. but stabilized in key markets in 2021 and in some cases began to increase. Tenants looking to renew leases are hoping to do so quickly to lock in lower rates.

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

Source: CBRE Research, CBRE Data Center Solutions, H2 2021.

• As demand grows in power-constrained markets like Silicon Valley and Northern Virginia, inventory bottlenecks likely will result in rental rate increases. Higher vacancy markets may see further pricing declines as competitive market conditions remain favorable to tenants.
• After falling by 2.3% in H1 2021 amid lower pricing in markets like Boston, Austin/San Antonio and Hillsboro, asking rates remained flat in H2. The average asking rate for a 250- to 500-kW N+1/Tier III requirement across secondary markets was about $130 kW/month, a $10 premium over the average for primary markets.
• Price stabilization continues, though data centers with robust network connectivity and purpose-built efficiencies continue to see pricing premiums over older, less-connected assets. As more new supply enters the market with increased connectivity, access to cloud on-ramps and key redundancies, the gap in average asking rates between certain quality assets will begin to shrink.

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

Source: CBRE Research, CBRE Data Center Solutions, H2 2021.

Investor demand for data centers remained robust in H2 2021

Record M&A activity, fueled by American Tower's acquisition of CoreSite and Blackstone's acquisition of QTS, accounted for most of the nearly $5 billion in data center investment volume in 2021. Average cap rates remained in line with H1 2021, with select trades in the high 3% range for core product. Foreign investors accounted for approximately half of the investment volume in H2 2021, reflecting growing global interest in the alternative asset class.

Notable H2 2021 investment activity included:

• American Tower’s acquisition of CoreSite for $10.1 billion.
• Blackstone’s acquisition of QTS for $10 billion.
• Mapletree’s acquisition of the Silas Realty Trust's portfolio of 29 data centers for $1.3 billion.
• Prudential & Digital Realty’s joint venture sale of 10 powered-shell data centers for $581 million.
• DigitalBridge’s Vantage SDC acquisition of CA22, a 24 MW hyperscale data center, for $539 million.

Outlook

Other large in-process asset sales could lead to record investment volume in H1. Rising interest rates will place pressure on cap rates, thereby impacting investors reliant on higher loan-to-value ratios, shifting buyer profiles. The diversity and amount of capital targeted at the data center sector remains healthy and competitive, benefiting investors and operators eager to capitalize on market conditions.

Investors remained focused on top-tier centers—particularly those with strong tenancy and significant remaining lease term—and assets capable of meeting customer demand for the right connectivity, on-ramps and density.

Cap rate compression continued in H2 2021. The majority of buying activity was data center platform purchases by private equity firms taking multiple public data center REITs private through M&As.

Vacant data center and second-generation enterprise data center valuations are becoming increasingly difficult to underwrite. Physical characteristics and local market fundamentals are more important. Enterprise facilities built for a specific use, with limited consideration for its second-generation market appeal, are often trading at a significant discount to replacement cost. Those assets with critical environments that support modern densities or that possess a fiber-rich network topology can mitigate the magnitude of the discount to replacement cost.

Cap rate compression continued in H2 2021. The majority of buying activity was data center platform purchases by private equity firms taking multiple public data center REITs private through M&As.

The importance of data center connectivity intensified in H2 2021 due to the robust increase in data volume driven by applications, 5G, IoT and the shift to hybrid work environments. In 2021, 90% of North Americans used the internet daily, spending an average of 7.35 hours online and collectively sending more than 10 billion emails per day.¹

As the digital climate evolves, the amount of network traffic flowing between data centers, the cloud, corporate computing platforms and end-users is growing exponentially. Fiber-optic networks lie at the heart of the solution to the massive demand for data transport.

Fiber is key to future-proofing networks for expanding data needs and emerging technologies because of its ability to accommodate and transport large amounts of data with low latency. In the next five years, the U.S. fiber network is expected to double in size, fueled by investments from both private and public sources.²

Operators are responding to unprecedented network demand by making moves to expand capacity and access. Corning, a manufacturer of fiber-optic cables, reported a 22% year-over-year increase in optical communications sales in 2021, reflecting the growing demand for fiber-related products.³

Although previous fiber buildouts in the 1990s and early 2000s focused on connecting top-tier centers, fiber construction over the next decade is expected to look a lot different, with the goal of pushing broadband to 95% of the nation’s homes and 85% of commercial buildings.⁴

Part of the fiber demand includes enormous fiber requirements for hyperscale facilities, which are tied to edge computing as new platforms roll out over the next several years. Investments in edge computing are increasing and expected to climb substantially in 2022, with spending forecast to reach $76.5 billion in the U.S. alone.⁵

Adoption of new virtual technologies—and emerging concepts such as the metaverse—will be impacted by the quality and speed of the experience delivered. To function as intended, latency-sensitive virtual technology will also require significant fiber resources and enhancements to the network infrastructure from the core to the edge.

¹ We are social, GWI, Statista, 2021.
² Cowen, 2021.
³ Corning, 2022.
⁴ Cisco and Vertical Bridge, 2021.
⁵ IDC, 2022.

• Power-delivery challenges will continue to affect the pace of new construction. Supply chain and workforce shortages will delay substation deployments.
• The migration to secondary and tertiary markets likely will increase in coming years, as limited space and power threaten to increase costs in supply-constrained primary markets.
• More 100+ MW leases will be signed, as purpose-built data centers attract single-tenant occupiers with growing data requirements. These large-scale requirements likely will remain driven by cloud service providers and ever-growing social media companies.
• The availability of clean power will have to increase exponentially as data centers move toward carbon neutrality. More industry players are beginning to consider the option of nuclear power, although there are concerns over its sustainability.
• Pricing will begin to increase in high-demand, low-vacancy markets like Northern Virginia and Silicon Valley. As vacancy rates drop in smaller primary markets and secondary markets, the squeeze in supply will also lead to price increases.

These markets are attracting the attention of the data center world