Data Center Demand
The surge in U.S. data center transactions involving private equity giants like Brookfield Infrastructure Partners and KKR & Co., totaling $43 billion between 2021 and 2023 according to Dealogic, reflects the growing demand for data infrastructure assets amid increasing digitization and cloud adoption
Technology giants like Meta (formerly Facebook) and Amazon are heavily investing in the development of their own data center campuses to support their growing operations and services. Meta is reportedly constructing an $800 million data center in Indiana to support artificial intelligence (AI) services, marking their latest move to obtain a competitive advantage in this emerging technology. Amazon Web Services (AWS) plans to invest $10 billion to build two data center campuses in Mississippi.
Furthermore, Blackstone’s ambitious project to build a $25 billion enterprise of data centers worldwide reflects the firm’s strategic focus on capitalizing on the growing expansion of AI and the increasing demand for data infrastructure. By investing in data center facilities, Blackstone aims to position itself at the forefront of the digital economy and leverage the massive computer capacity housed in these cutting-edge facilities. QTS, a data center operator that Blackstone purchased in 2021, is at the heart of this initiative.
“Data centers are seeing increasing investor allocations – with the sector having a 9% CAGR in transactions since 2013 – the highest of any sector other than life sciences, wrote global real estate services company JLL in its North America Data Center Report.
JLL’s managing director of data center markets, Andy Cvengros, said, “Demand continues to be at all-time highs, and data center growth is rapidly expanding from core markets in search of power.” He added that most of the capacity coming online this year is already pre-leased.
The shortage of supply in primary markets has led users to turn to secondary markets to meet their data center needs, accounting for nearly 20% of capacity under construction, according to JLL. Data center construction reached a new high in 2023, with 3,077.8 MW under construction in primary markets; however, 83% of the available supply is already pre-leased. In addition, vacancy rates remained at a record low of 3.7% in 2023.
“Data center developments will expand to wherever there is enough power and available land,” said Karl Beets, a senior manager at JLL. “As capacity becomes limited in major markets, developers will seek stranded power, especially for AI uses for which latency is less of a concern. New tertiary markets and outposts will open, focused on reusing power capacity developed for other uses.”
According to Synergy Research Group data and forecasts, the average capacity of hyperscale data centers set to open in the next six years will soon be more than triple that of present operational hyperscale data centers.
“While the trend has always been for the critical IT load of hyperscale data centers to grow over time, the impact of generative AI technology and services has provided an added impetus to the need for substantially more powerful facilities,” wrote Synergy. “The overall result is that the total capacity of all operational hyperscale data centers will grow almost threefold in the next six years.”
The need for data centers shows no signs of decreasing. CBRE reports that average asking rent prices in major North American data center markets have experienced a significant increase of 20% to 54% in the past eight months.
Currently, occupiers tend to pre-lease space 18 to 36 months ahead of time, which is far sooner than the norm of six to 12 months, CBRE highlighted.
The expansion in markets such as Chicago, Dallas-Ft. Worth, Northern Virginia, Phoenix, and Silicon Valley is being propelled by robust demand that is exceeding the rise in supply. As a result, rates have reached levels near their highest point of 2010 to 2011.