Demand Surges for Unbuilt Data Centers as Companies Reserve Space Well in Advance

Why it matters: Demonstrating the critical value of data as the modern era’s most sought-after resource, the current surge in data center construction underscores this point vividly. Companies are eagerly securing data center spaces long before their completion, highlighting the pressing demand for data storage and processing capabilities.

The statistical evidence is overwhelming – a study by CBRE revealed that an astonishing 84% of the significant data center capacity presently being developed in the US has been pre-leased. This is a massive increase compared to the usual pre-leasing rate of about 50% witnessed in recent years.

This high level of pre-commitment indicates an extremely tight market, with the current national vacancy rate for data centers standing at just 3.7%. This scarcity has enabled owners to substantially increase rental rates – seeing an average uptick of 19% over the past year.

Even more dramatic rent increases have been observed in major data center markets like Northern Virginia, where the rates soared by 42% on a year-over-year basis.

The intense demand for data center space is largely driven by the significant time it takes to build these complex facilities, as highlighted by Sherwood. The process includes the physical construction, the establishment of power supplies, the laying of fiber optic cables, and the acquisition of necessary permits and utilities, spanning several years from initiation to completion.

By the time these facilities become operational, the demand, notably from AI companies, cloud service providers, and various enterprises, already exceeds supply. The emergence of generative AI technologies further amplifies this demand.

The tight squeeze on data center spaces shows no sign of abating. In key regions like Northern Virginia, Silicon Valley, and Phoenix, rental rates have jumped by 20-54% in under a year as vacancy rates hit record lows, according to a March CBRE report.

Normally, new constructions and investments would mitigate such price surges. However, the unique challenges of this real estate sector, particularly the need for substantial power sources, present significant hurdles. The report notes that companies now typically secure leases 18-36 months in advance, a significant increase over the previous 6-12-month pre-leasing period.

Recently, Microsoft finalized a $10 billion arrangement with Brookfield for the development of new renewable energy sources dedicated to powering data centers, though these solutions will take time to implement.

With the construction of over 3,000 MW of data center capacity underway, setting a new benchmark for the industry, the data nevertheless points to a probable future shortfall in supply.

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