Data Centers Experiencing Record Growth Amid AI, ML Expansion
The data center sector is witnessing historic growth amid the continued rise of artificial intelligence (AI) and machine learning (ML). according to global commercial real estate firm JLL’s First Half 2023 North American Data Center Report.
Hyperscalers, financial businesses, healthcare companies, and other significant enterprises raced to secure data center space in the first half of this year, setting records. On a regional basis Phoenix and the Northwest have outpaced other areas such as Northern Virginia.
According to JLL, secondary real estate markets such as Columbus, Salt Lake City, Reno, and Austin will continue to support the overflow from limited core markets.
“The data center industry is continuing to experience explosive growth in demand which is leading to completely sold-out primary markets, secondary market expansion and the development of newer tertiary markets,” said Andy Cvengros, managing director, JLL.
According to JLL, the majority of the supply expected to be delivered in the latter half of 2023 and 2024 has been pre-leased or is under exclusivity, leaving users with few options.
Primary markets already have a limited supply of colocation space, prompting data center operators to raise prices by up to 20% to 30%.
“AI implementation requires significant computing power and resources, which translates to increases in leasing,” said Kari Beets, senior manager, research, JLL.
Along with cloud adoption, AI is propelling hyperscale growth. According to JLL, AI models are transforming data center architecture, with certain significant requirements driving densities to 50-100 kilowatts per rack. Many colocation providers have reduced the voltage provided to the floor to 415 volts, which can lower the initial cost of powering these high-density clusters.
Major cloud service providers are fast expanding to meet new AI requirements, and with that expansion comes the need for more computing power, making it even more difficult to find space. According to JLL, this has resulted in a large increase in leasing in the second quarter of 2023.
Despite the high interest rate environment, data center lender and investor demand remain strong. The industry continues to attract a variety of lenders, including life companies, banks, debt funds, and CMBS/SASB, and the data center sector’s record-breaking M&A activity over the last two years continues, with an influx of recent large announcements, according to the JLL.
With the 10-year Treasury yield rising, fixed rate spreads have increased by more than 300 basis points in three years, affecting cap rates and asset valuations, noted JLL.
EBITDA multiples are also increasing. According to Carl Beardsley, managing director of capital markets at JLL, these multiples have averaged 26.5x in the last 12 months, compared to an average of 23.2x since 2017.