Why it matters: If you need more evidence that data really is the new oil, look no further than the data center construction boom happening right now. Companies are so thirsty for data storage and computing power that they are basically reserving data center space years before the facilities are even completed.
The numbers are staggering – real estate firm CBRE found that a whopping 84% of the massive data center capacity currently under construction in the US has already been pre-leased. To put that in perspective, the typical pre-leasing rate hovered around just 50% over the last few years.
With so much capacity already spoken for, it’s no surprise the market remains incredibly tight. The nationwide vacancy rate for data centers is at a razor-thin 3.7% currently. Such scarcity economics are allowing owners to really cash in – average rents spiked 19% over the last year.
The rent hikes were even more astronomical in data center hotbeds like Northern Virginia, where prices were jacked up by 42% year-over-year.
Driving this voracious appetite for data center space are the lengthy lead times required to actually build out these highly technical facilities. As reported by Sherwood, it takes years on average from start to finish when accounting for things like physical construction of the data center building itself, bringing new power sources online, laying fiber lines, and, finally, securing permits and utility rights.
Essentially, by the time a new data center opens its doors, it’s already behind the curve in meeting skyrocketing demand from AI companies, cloud providers, enterprises, and others. The rise of generative AI models is only supercharging data needs further.
There’s no end in sight to the data center space crunch. In major markets like Northern Virginia, Silicon Valley, and Phoenix, average rents have spiked by 20-54% in just the last eight months as vacancy rates plummet to all-time lows, according to another CBRE report from March.
Historically, an influx of new construction and investor money would ease pricing pressures. But in this unique real estate niche, the biggest roadblock is accessing sufficient power sources to keep servers humming. The report highlights that companies now routinely pre-lease space 18-36 months in advance, much earlier than the old 6-12-month timeframe.
Earlier this month, Microsoft inked a $10 billion deal with energy giant Brookfield to construct new renewable power generation devoted to data center operations. But again, such solutions take years to come online.
With over 3,000 MW of data center capacity underway, that’s easily an all-time high for the sector. But even with that feverish building pace, the data suggests that we are still on course for a significant shortfall in supply.