strong fundamentals lead to record- setting … · strong fundamentals lead to record-setting...

U.S. DATA CENTER TRENDS REPORT H1 2017

Strong Fundamentals Lead to Record-Setting Investment in Data Centers

CBRE Research` © 2017 CBRE, Inc. | 2


Contents

04 Market Fundamentals

06 Supply & Demand

10 Investment / M&A

12 Things to Watch

13 Primary Markets

17 Secondary Markets

20 Market To Watch



CBRE Research

Executive Summary

• Investmentindatacenterrealestatereachedafeverpitchinthefirsthalfof2017.

• Absorptionwassubdued,ashyperscalecloudusersstayedonthesidelinesinH1,astheydigestedlastyear’senormousleasingvolume.

• Proximityandaccesstocloudservicesandlatency-sensitiveinterconnectionnodestoexistingnetworksarestillthestrongestdriversofretail/colocationrequirementsforenterpriseusers.

• Nationalpricingstandardizationofrentalratescontinuestoemerge,wherevariabilityinpricingisdictatedmorebytheneedandtypeofrequirementversusgeographyormarketlocation.

• Thereisahighertoleranceforspeculativedatacenterdevelopmentasprovidersbecomemorecomfortablewiththestrengthoftheirsalespipelineandthetransparencyofuserexpansiongoals.



CBRE Research

Followingasubstantialrunofmulti-megawatt(MW)leasesthatcontributedtorecord-levelsofnetmulti-tenantdatacenterabsorptionineachofthepasttwoyears,hyperscaleCloudServiceProviders(CSPs)werelargelyonthesidelinesinthefirsthalfof2017.WiththebulkofCSP-relatedactivityoccurringaspre-leasinginnewdatacenterprojects,it’snotsurprisingthathyperscaleusersaretemporarilyfocusedonbuildingoutanddeployingtheircloudinfrastructure.However,therobustadoptionofrapidlyevolvingdata-intensivetechnologyremainsonanearlyunwaveringupward

trajectoryandwilldrivestronggrowthofthedatacentersectorgoingforward.

CBREmeasuresnetabsorptioninthedatacentersectorasthenetchangeinexisting/commissionedwholesalepowercapacityandthefirsthalfoftheyearsawnearly88MWofpositiveoccupancygains,amongthesevenmajordatacentermarkets.1TheNorthernVirginiamarketinparticularremainsastrongoutperformer,withnetabsorptiontotalingnearly42MWinH12017—onpacetomatchandpotentiallyeclipse2016’sfull-yeartotalofmorethan84MW.

Market Fundamentals

*Rental rates are quoted asking rates for 250+ kW at N+1/Tier III requirements. Arrows indicate changes in H1 2017.Source: CBRE Research/CBRE Data Center Solutions, H1 2017.

Figure 1: Market Fundamentals

Market Inventory (Q4/Q2) Vacancy (Q4/Q2) Net Absorption Rental Rates (kW/mo)*

Northern Virginia 608 MW (é 52 MW) 35.2 MW / 5.8% (é 120 bps) 41.5 MW $120-$145

Silicon Valley 169 MW (é 14 MW) 9.0 MW / 5.3% (é 70 bps) 12.0 MW $145-$165

Chicago 188 MW ( -0 MW) 4.0 MW / 2.1% (ê 310 bps) 4.2 MW $130-$145

New Jersey/New York 155 MW ( -0 MW) 28.2 MW / 18.2% (ê 110 bps) 2.9 MW $130-$150

Dallas/Fort Worth 231 MW (é 23 MW) 38.8 MW / 16.8% (ê 300 bps) 22.0 MW $120-$145

Phoenix 169 MW (é 14 MW) 14.9 MW / 8.8% (é 570 bps) 3.8 MW $120-$135

Atlanta 117 MW (é 9 MW) 10.8 MW / 9.2% (ê 220 bps) 3.0 MW $120-$135

Southern California 88 MW ( -0 MW) 14.0 MW / 16.3% (ê 170 bps) 1.9 MW $130-$160

Seattle 107 MW (é 2 MW) 19.9 MW / 18.8% (ê 220 bps) 2.2 MW $120-$150

Boston 60 MW ( -0 MW) 14.7 MW / 24.4% (ê 170 bps) 1.0 MW $150-$180

1Atlanta, Chicago, Dallas/Fort Worth, New York Tri-State Region, Northern Virginia, Phoenix and Silicon Valley.



CBRE Research

Withhyperscaleusersstilldigestinglastyear’senormousleasingvolume,newleasesinH12017werelargelybyenterpriseuserswithsmallerrequirementsofbetween500kilowatts(kW)to1MW.Forthisreason,therewereonlyahandfuloftransactionsformorethan1MWinH12017.

Majormarketsarestillfavoredbybothhyperscaleandenterpriseusers,aswellasthird-partydatacenteroperators—atrendthatshowsnosignsofslowinginthenear-term.Proximityandaccesstocloudservicesandlatency-sensitiveinterconnectionnodestoexistingnetworksisstillthestrongestdriverofretail/colocationrequirements.

Source: CBRE Research, H1 2017.

Figure 2: Primary Markets - Net Absorption & Pre-Leasing

Mega

Watts

250

200

2015 2016 H1 2017 Pre-Leased

150

100

50

0



SPECULATIVE DEVELOPMENT ON THE UPSWING

Thedatacentersupplypipelinecontinuestoaccelerate,withnearly284MWofwholesalecapacitycurrentlyunderconstructioninCBRE’sprimarydatacentermarkets.Thatcapacityisalready46%pre-leased(131MW).Dependingonwhentheseprojectsarecompleted,thislevelofpre-leasingimpliesthatannualnetabsorptioncouldapproachtotalsofthepasttwoyears.Whilepre-leasinglevelshaveconsistentlybeenin45%-to-65%rangeoverthepastseveralyears,therehasbeenasubtleshiftinthepastseveralquarterstoahighertoleranceforspeculativedevelopmentasaresultofsustaineddemandfordatacenterservices.Inparticular,hyperscaleCSPsaremoreopenlysharingtheirexpansiongoalswithdatacenterproviderstoencouragespeculativedevelopment,asspeed-to-marketisoftenacriticalfactordrivingthesedeployments.

NorthernVirginiaremainsthemostactivedevelopmentmarket,withmorethan10new

Supply & Demand


Figure 3: Net Absorption Vs. Under Construction By Market

Atlanta Chicago Northern VA Phoenix Silicon Valley New York Tri-State

Dallas Fort Worth

Mega

Watts

140

120

100

80

60

40

20

03 8 4

41

22

4742

4 3

28 30

1212

119

YTD Absorption Under Construction

projectscurrentlyunderwaywithaneye-popping119MWofwholesalecapacity.NorthernVirginiaisthelargestandmostactivedatacentermarketintheworld,withitswholesaleinventorylargerthanthatofanycountryinEuropeorAsiaPacific.OthermarketswithsignificantsupplypipelinesincludeDallas/FortWorth(47MW),Chicago(41MW),SiliconValley(30MW)andPhoenix(28MW).

Vacancyratesforexisting/commissioneddatacenterspaceinprimarymarketsremainedrelativelyunchangedinH1.SiliconValley(5.3%)andChicago(2.1%)havethelowestexistingvacancyratesinthecountry,effectivelylimitingimmediateoptionsinthesemarkets.Userswithasignificantnear-termwholesaleneedareeffectivelylimitedtopre-leasingorwaitingforthedeliveryofnewcapacity.Giventhetightmarketconditionsandstrongdemand,developersareactivelycompetingforstrategiclandsitesinbothprimaryandsecondarymarkets.



AsU.S.multi-tenantdatacentermarketscontinuetomature,thebalancebetweenspeculativelyavailablesupplyandestablisheddemandiscritical.Bycomparison,coremarketsinbothEuropeandAsiaPacifichaveaveragedvacancyratesofbetween15%and20%forthepastseveralyears,withavailabilitysometimesaveraginguptothreeyears’worthofannualaverageabsorption.

THE EMERGENCE OF NATIONAL PRICING

Since2015,therehasbeenvirtuallynochangeinaveragewholesalerentalratesintheU.S.(asmeasuredonaspaceandpowerbasis).Thelargestinfluenceonratevarianceisoftendictatedbytermlengthandcreditqualityofthetenant.Onadirectcomparisonbasis,averageratesforastraightforwardTierIII/N+1wholesaledeploymentintheU.S.stillrangebetween$125and$145perkWpermonth(modifiedgross)acrosseitherprimaryorsecondarymarkets.

Thisunderpinsthegrowingemergenceofnationalpricingstandardization,wherepricingvariabilityisdictatedmorebytheneedandtypeofrequirementthanbygeographyormarketlocation.Specificfactorsaffectingpricinginclude:

• Thespecificresiliencyneedsoftherequirement(i.e.,Nvs.2N,lowdensityvs.highdensity).


Figure 4: Construction Pipeline – Available & Pre-Leased Supply Under Construction

140

120

100

80

60

40

20

0Northern Virginia

Dallas/ Fort

Worth

Silicon Valley

Chicago New York Tri-State

Pheonix Atlanta BostonSeattle Southern CA

Pre-Leased Available

• Thetypeofapplicationsbeingdeployed(i.e.,disasterrecoveryvs.high-frequencytrading).

• Theoperatingmodelandmarketnicheofthedatacenteroperator(i.e.,wholesalevs.services-centricretail).

• Thelevelofservicesutilizedbythetenant.

Total-cost-of-occupancy(TCO)factorsthatarespecificallyuniquetocertaingeographicareas—suchasutilitycosts,taxratesandanydatacenter-specificincentiveprograms—oftenplayamorecriticalroleinmarketsiteselectionthanprevailingrentalrates.



RECOVERY CONTRACTION

EXPANSION BALANCED/ GROWTH LA

ND

LORD

FA

VORA

BLE

TEN

AN

T FA

VORA

BLE

VACANCY UNDER SUPPLY RENT

VACANCY OVER SUPPLY RENT

MARKET EQUILIBRIUM

Southern

Silicon ValleyNorthern Virginia

Pheonix

Chicago

New York Tri-State

Dallas/ Fort Worth

Atlanta


Figure 5: Data Center Market Cycle*

DEMAND: A TALE OF TWO SEGMENTS

Portland MA

RKET

GRO

WTH

MARKET PROFILE

Minneapolis

Denver

MATURE/ PRIMARY

EMERGING/ SECONDARY

DEVELOPING/ TERTIARY

HIGH

MODERATE

LOW

North Carolina

Northern Virginia

Dallas/ Fort Worth

New York/New Jersey

Atlanta

Phoenix

Chicago

Silicon Valley

Southern California Austin/San Antonio

Las Vegas

Boston

Houston


Figure 6: Data Center Market Maturity

*The Data Center Market Cycle Graph reflects the current wholesale market conditions, taking into consideration the following variables:

• Demand (leasing, absorption, requirements in the market)

• Supply (existing vacancy, future availabilities, construction pipeline)

• Rental rate trend

Distance from the horizontal market equilibrium line generally implies the relative strength and/or weakness of a market relative to each other and their historical trends. Arrows indicate most recent trend.

Categories typically represent the following conditions:

Expansion: landlord/provider-favorable conditions; un-der-supplied market, strong demand, declining vacancy and upward pressure on pricing

Balanced/Growth: landlord/provider-favorable conditions; new supply more evenly balanced, stable or slightly increas-ing vacancy, rent growth slowing or flat

Contraction: tenant-favorable conditions; over-supplied market, increasing vacancy, weak demand, downward pressure on pricing

Recovery: tenant-favorable conditions; stable or slightly declining vacancy, moderate but improved demand, rent growth flat or increasing



What do enterprise users want?

DuetotherapidadoptionofhybridITsolutions—avariablemixofcloudservices,third-partycolocationandowned,on-premiseinfrastructure—theinitialthird-partyITrequirementsbyenterpriseusersaregenerallyshrinking.Thiscontrastswithseveralyearsago,whenuserswouldoftenover-commitandunder-utilizetheirleasedcapacity.Largerrequirementsareusuallyforhigh-performancecomputingneeds(HPC)andareoftendeployedatcost-efficientNorbasicN+1redundancies.

Enterpriseusersaregenerallyfocusedonthreethingsregardingleasedspace:

1)Contractflexibility,whichincludestheabilitytoeasilyincreaseordecreasetheirleasedcapacity,theabilitytolayerinmanagedservicessuchascloud,cybersecurity,etc.intotheirspend,ortore-distributeleasedcapacitytootherlocations/needswithinaprovider’sportfolio.

2)Proximityandaccesstocloudservices,includingdesignated“onramps”orcloudnodeswherelatencytoservicecriticalapplicationsiscritical.

3)Reliability,asthegrowingnumberofhigh-profiledatacenteroutagesthathavebeenprofiledinthenewsoverthepastyearcontinuetounderscorethebottom-lineriskforenterpriseusersowningandoperatingtheirowndatacenters.

CBRE’s2017U.S.Outlooknotedthedivergingneedsofthetwolargestusersofthird-partydatacenters—hyperscaleCSPusersandtraditionalenterpriseusers—andhowtheycouldpotentiallytransformdevelopmentandprovidertrendsinyearsahead.Demandfromenterpriseuserswillcontinuethisyear,astheyexecutetheirslow-and-steadymigrationofITworkloadstothecloudandthird-partyfacilities.Meanwhile,allindicatorsarethatrequirementsfromhyperscaleCSPuserswillsubstantiallyreturn,withseveralsizeabledealsrumoredtobeinthemarket.

What do hyperscale users want?

Hyperscaleusers—broadlydefinedasamulti-megawattuser,typically5+MWandlarger—arefocusedonthreeprimaryareas:

1)Geographicexpansionintomultiplenewmarketsorregions.

2)Businessandrevenueexpansion,andgrowthtoanticipateandmeetcustomerdemand,througheithercloudservicesorotherplatforms.

3)Theabilitytoscaleandaddcapacityquicklyandefficiently,withspeed-to-marketbeingapriority;strategyisfocusedonpower,spaceandcoolinginthemostcost-effectivemannertokeeppricinglow.

https://researchgateway.cbre.com/Layouts/PublicReportAccess/Default.aspx?3FPUBID=3Dda0d8423-3efc-4aa5-af6d-14208cc446b3

https://researchgateway.cbre.com/Layouts/PublicReportAccess/Default.aspx?PUBID=da0d8423-3efc-4aa5-af6d-14208cc446b3

https://researchgateway.cbre.com/Layouts/PublicReportAccess/Default.aspx%3FPUBID%3Da70aaa77-2155-4bfb-b6ac-69e6e1068013



Investmentinthedatacentersectorreachedafeverpitchinthefirsthalfof2017,totalingastaggering$18.2billionwhenincludingallsingle-asset,portfolioandentity-level/M&Atransactions.Thistotalisalreadymorethandoublethatforallof2016andisontrackforthis

year’sannualtotaltoeclipsethatofthepastthreeyearscombined.Overthepastfiveyears,morethan$45billionofinvestmentcapitalhasflowedintothedatacentersector,withmorethan50%ofthattotaloccurringsinceQ42015.

Investment / M&A

Buyer Location MarketSales Price ($ millions)

Type

Equinix Verizon portfolio (24 assets in U.S.) Multiple (15 markets) $3,600 Occupier/Operator

GI Partners KOMO Plaza Seattle $276 Investment

Carter Validus 250 Williams Street Atlanta $166 Investment

CentralColo Tysons Technology Center Northern Virginia $96 Occupier/Operator

Carter Validus 6 Norden Place (Norwalk) New York Tri-State $59 Investment

QTS 14100 Park Vista Boulevard (Fort Worth) Dallas/Fort Worth $50 Occupier/Operator

Carter Validus 400 Minuteman Road (Andover) Boston $37 Investment

H5 Data Centers Cleveland Technology Center Cleveland $31 Occupier/Operator

Ascent 4905 North Point Parkway (Alpharetta) Atlanta $30 Occupier/Operator

Lincoln Rackhouse 40 Perimeter Center East Atlanta $19 Investment

Carter Validus 1400 Cross Beam Drive Charlotte $16 Investment

Carter Validus 2601 West Broadway (Tempe) Phoenix $16 Investment

DataBank Stream Data Centers Dallas/Fort Worth undisclosed Occupier/Operator

Total $4,396

Buyer Acquisition Sales Price ($ millions)

Number of Data Centers

Digital Realty DuPont Fabros $7,600 12

BC Partners / Medina Capital (now Cyxtera Technologies) CenturyLink (data center portfolio) $2,800 57

Peak 10 ViaWest $1,675 24

Digital Bridge (consortium) Vantage Data Centers $1,200 7

CyrusOne Sentinel $500 3

Stonepeak Infrastructure Partners Cologix undisclosed 24

DataBank C7 Data Centers undisclosed 4

Chirisa Investors / Lumerity Capital / Longboat Advisors 365 Data Centers undisclosed 8

Total $13,775 139

Figure 7a: Data Center Asset Sales - YTD 2017

Figure 7b: Entity-Level Data Center Transactions - YTD 2017





Threelargedealspushedinvestmenttotalsoverthetop,includingtwolargeacquisitionsthatwereannouncedinlate2016butofficiallyclosedbymidyear2017:

• Equinixacquireda29datacenterassetportfoliofromVerizonfor$3.6billion.Theportfoliospans15marketsandincludes24assetsintheU.S.,includingthestrategicallysignificantNetworkAccessPoint(NAP)oftheCapitalRegioninCulpepper,VAandtheNAPoftheAmericasinMiami.

• ApartnershipofBCPartnersandMedinaCapitalacquiredCenturyLink’sdatacenterbusinessfor$2.8billion,aportfolioof57datacenters.Thebuyersimmediatelylaunchedanewoperatingentity,nowknownasCyxteraTechnologies,withinitialplanshintingataddingnewcybersecurityservicesintotheirserviceoffering.

• DigitalRealtyTrustacquiredDuPontFabrosforanestimated$7.6billion,bolsteringDigital’salreadysizeablefootprintinkeycoremarkets,includingNorthernVirginia,ChicagoandSiliconValley.ThedealwassignedrightafterDuPontannouncedmorethan29MWinnewleasingfromaprominenthyperscaleCSP.

Othernotabletransactionsincludedretail/colocationproviderPeak10acquiringViaWestfor$1.7billionfromShawCommunications.Theportfolioof24datacentersgivesPeak10anationalfootprintandpotentiallypositionsitformorewholesale-likeofferings.AfteracquiringDataBankin2016,aconsortiumledbyDigitalBridgeacquiredVantageDataCentersfor$1.2billion,oneofthefewproviderswiththecurrentabilitytobringnewwholesalecapacityonlinelaterthisyearintheseverelysupply-constrainedSiliconValleymarket.

Thevolumeofindividualassetsalescontinuedtogaintractionaswell,withtransactionsevenlydividedbetweeninvestorsandowner/occupiers.Thisnumberisexpectedtoincreasethisyear,asthereareseverallegacycorporatedatacenterassetsbeingmarketedandreceivingstronginvestorinterest.Demandandpricinglevelsforthesetypesofcorporateassetshavehistoricallybeensporadicdependingonlocationandbuyerintent.Generally,dispositionswithvaryinglevelsofvacancyareviewedmorefavorablyinprimarymarketswith

strongend-userdemandandfavorablemarketfundamentals.Vacantcapacityinsecondaryortertiarymarkets,however,isoftentimeslessdesirable.Forassetswithamixtureofleasedandvacantcapacity,marketpricingvariesdramaticallybasedonthestrengthoflocalmarketdemand.Forthesepartiallyleasedassetsinsecondaryortertiarymarkets,strikingtherightbalancebetweenmaximizingthesalespriceandminimizingtherentalexposurecanbeadifficultbalancingact(seeCBRE’sQ4 2016 U.S. Data Center Trends report).

$USD

(Milli

ons)

$50,000

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Apr-1

1

Apr-1

2

Apr-1

3

Apr-1

4

Apr-1

5

Apr-1

6

Apr-1

7

Jul-1

1

Jul-1

2

Jul-1

3

Jul-1

4

Jul-1

5

Jul-1

6

Oct-1

1

Oct-1

2

Oct-1

3

Oct-1

4

Oct-1

5

Oct-1

6

$45,000

$30,000

$15,000

$40,000

$25,000

$10,000

$35,000

$20,000

$5,000$-

Figure 8: Cumulative InvestmentEntity-LevelAsset/Portfolio Total


https://researchgateway.cbre.com/Layouts/PublicReportAccess/Default.aspx?PUBID=4ef24640-c66a-469c-9a0b-035a90e7cf3e



Things to WatchCloud vs. ColocationWilltherapidincreaseofenterprisecloudadoptionhelporhurtthecolocationmarket?Arefootprintsshrinkingorjustsettlingintoapatternofmoremeasured,strategicgrowthasdata-relatedcomputeandstorageneedswillonlycontinuetoexpandexponentially?

Infrastructure vs. The EdgeConnectivityandlatencyneedsarekeepingdatacenterdemandcenteredonprimarymarketsandatthe“edge”ofexisting,in-placenetworks;however,thenecessarygrowthofsecondaryandtertiarymarketswilllikelydependonsignificantinfrastructurebeingbuilt(fiber,power,etc.).Cangainskeeppacewiththedemandsoffuturenetwork-dependentapplications?

The Big Getting BiggerU.S.providershavehadsuccessfulinternationalexpansion,butwillinternationaloperatorscometotheU.S.andwilltheirmodelswork?Cannichecloudprovidersemergeandsucceedversushyperscalegiants?



Pickingupmomentumfrom2016,Atlantaemergedasoneofthemostactivemarketsinthecountryinthefirsthalfof2017.Ahandfulofnewprovidersannouncedtheirentryintothemarket,whichoverthecourseofthenextseveralquarterscouldaddsignificantnewwholesalecapacitytothemetroarea.ThelargestprojectcomesfromSwitch,whichannounceditwouldinvest$2.5billioninDouglasCountytocreateaSoutheastcampusdubbed“TheKeep.”Othernewentrantsinclude:DataBankviaafacilityanchoredbyGeorgiaTech’sHPCresearchcenter(thefacilitywillbedesignedfor45kWperrackandbepartofthelargermixed-useCODAdevelopmentindowntownAtlanta)andAscent,whichacquiredasale-leasebackopportunityinAlpharettawiththeabilitytoeventuallyadd8MWofcapacityovertime.

NetabsorptioninH12017totaledroughly3MW,helpingpushthecity’sdatacentervacancyrate

downto9.2%atmidyearfrom11.4%inQ42016.Thecurrentconstructionpipelineremainsrelativelylowfornow,withonly7.5MWcurrentlyunderconstruction.Notably,DataSiteannouncedtheexpansionofitsAtlantafacilityby10,000sq.ft.and1MWofcapacity,withpotentialforanadditional2MWofcapacity.

Thedowntowncore’sinterconnectionmarketwasequallybusyinH1:CarterValidusMissionCriticalREITacquired250WilliamsStreet(alsoknownastheAmericanCancerSocietyCenter)for$166millioninQ2.ThebuildinghassignificantdatacentercapacityandDigitalRealtysubsequentlyannounceditwasleasing18,000sq.ft.ofraisedfloorinthebuildingwithafiberconnectionbacktoitsnearfully-leasedspaceatcarrierhotel56Marietta( justoverahalfmileaway).

Atlanta

Primary Market Insights

TheextremelylimitedamountofavailableexistingsupplyintheChicagowholesaledatacentermarketcontinuestoinfluencemarketdynamics,asthefirsthalfof2017sawonly4.2MWofnetabsorption.Withvirtuallynonewsupplybeingdeliveredsinceyear-end2016,thevacancyratedeclinedtoascant2.1%—thelowestintheU.S.amongprimarymarketsandrepresentinglessthan4MWofavailableexistingcapacity.

However,thisdoesn’tpaintacompletepictureofactivityinChicago.Severaldatacenteroperatorshaveanecdotallysharedtheyhavelostoutontransactionssimplybecausetheycouldnotdelivercapacityfastenough.Consequently,thelargestdatacenterlandlordsinthemarket—Digital

Realty,DuPontFabrosandCyrusOne—havebeenquicklyrampingupnewconstructiontomeetfuturerequirements.Therearecurrently40.8MWunderconstructioninChicagoamongthosethreelargeproviders,28.6MWofwhichisalreadypre-leasedtovarioustenants.

ThelargestnewfacilityunderwayisDuPontFabros’CH3facilityinElkGroveVillage.JustpriortoitsannouncedmergerwithDigitalRealty,theproviderrevealeda14.4MWleasetoahyperscaleuser,effectivelypre-leasingallofphaseIofCH3.Currentplansaretodeliverthe12.6MWphaseIIsimultaneously,withatargetcompletiondateof2018.

Chicago



TheDallas/FortWorthmarkettotaledahealthy22MWofnetabsorptioninH12017,asmuchofthenewproductbeingdeliveredwasmetwithapent-updemand.Asaresult,thevacancyratedeclined3percentagepointsto16.8%atmidyear.Muchofthepreviouswholesaleavailabilitywaslocatedineitheraginglegacyassetsorsmallmegawatt-sizedpocketsthroughouttheMetroplexandsimplydidnotmatchthedemandprofilerequirementsinthemarket.It’sforthisreasonthatDallas/FortWorthhadlikelynotseenanabundanceofhyperscaleCSPleasingsimilartootherprimarymarketsofitssize;however,thereisevidenceofthattrendchanging.

WithCyrusOneandDigitalRealty—thetwolargestdatacenterlandlordsinthemarket—nearingfullcapacityattheirexistingcampuses,thesupplypipelineandthenear-termopportunitiesforotherprovidersremainsaprevailingstoryintheMetroplex.Therearecurrently10activemulti-tenantprojectsunderconstruction,totaling46.7MW.Thefirstphasesofallprojectsarebeingdeliveredonaspeculativebasis,indicativeofthe

strengthoftheDallas/FortWorthdemandpipeline.BothRagingWireandTierPointdeliveredcapacityinthefirsthalfoftheyear,andT5DataCentersispoisedtohave1.5MWcommissionedinthethirdquarterattheirnewfacilityinPlanowithmorethan70acresofexpansionpotentialatthesite.

TwonotableacquisitionsinH12017willalsoquicklyaddcapacityintheshort-term.DataBankacquireda145,000-sq.ft.poweredshellfromStreamDataCentersintheLegacybusinessparkinPlano.ThefacilitywillbeStreamDataCenters’thirdinDallas/FortWorthanditsfirstphasewilladd72,000sq.ft.ofraisedfloorinearly2018.QTSalsoacquireda260,000-sq.ft.datacentershellfromHealthCareServiceCorporation(HCSC),withleasingofanexisting40,000sq.ft.ofdatacenterspacealreadyunderwaytoendusers.Notably,thefacilityissituatedintheAllianceTexasmaster-plannedareanorthofFortWorth,whichispositioningitselfasafuturedestinationhubwithmorethan85acresidentifiedforfuturedatacenterdevelopment.

Dallas/Fort Worth

ThePhoenixdatacentermarketregisteredroughly3.8MWofpositivenetabsorptioninthefirsthalfof2017,althoughthistotaldoesn’treflectthenearly13MWofleasingactivityoverthesameperiod.AnumberofnewvacanciesatIODataCentersandDigitalRealtyTrustcontributedtonegativenetabsorptioninthe8-to-9-MWrangeinthefirstquarter,draggingdownnetoccupancygains.Asaresult,theoverallvacancyrateincreasedto8.8%atmidyear,upfromthealmostunsustainablylow3.1%inQ42016.

WhilePhoenixhasnotbeenimmunefromthesluggishpaceofhyperscaleCSPleasingaffectingotherprimarymarketsinH12017,providersaddingnewcapacitytothePhoenixmarketareseeingtraction.Mostnotably,CyrusOnedelivered9MWof

fully-leasedcapacityatitsChandlercampus,andhasadditionalpre-leasingofnewcapacitythatisslatedtodeliverlaterthisyear.AlignedDataCentershasalsoleasednearly3MW(60%)ofitsfirst5MWphase,withtheabilitytophaseinadditionalcapacityasneeded.

Arizona’spotentialasadestinationmarketremainsstrong.Severalprovidersandlarge-scaleuserscontinuetoexploreexpansionandmarketentryoptionsinvariouslocalesthroughoutthePhoenixmetroarea.Aninfluxofnewcompetitorsanddiversityofwholesalesupplyisgenerallyviewedasapositive.Arizona’sdatacenterincentivesprogramwilllikelyalsocontinuetobeanattractivedrawforfuturedemand.

Phoenix



TheNorthernVirginiadatacentermarketcontinueditsrobustoutperformanceofotherprimarymarketsintheU.S.(andglobally),tallying41.5MWofoccupancygainsinthefirsthalfof2017.Thebulkofthisnetabsorptionwasfrompre-leasingthatoccurredlastyear,asprovidersbarelykeepaheadofdemandwithnewdeliveriesthatareconsistentlyeithersubstantiallyorfullypre-leased.ThelargestnetgainsinH12017absorptionwerebyDigitalRealty(+16.2MWinAshburnBuildingsJandH),DuPontFabros(+10.1MW)andCyrusOne(+6MW).

Thevacancyrateincreasedslightlyatmidyearto5.8%,butthisissimplyaresultofthepaceofnewsupplybeingadded,whichtotaled52.2MWinH1.Theprevailingvacancyraterepresentsjustover35MWofexistingavailablecapacity,essentiallylessthantwoquartersworthofabsorptionwhencomparedtothemostrecentthree-yearhistoricalaverageinthismarket.

TheamountofnewsupplyunderconstructioninNorthernVirginiacontinuestobeeye-popping,

effectivelydwarfingthetotalsofeventheclosestprimarymarket(currentlyDallas/FortWorth).Therearecurrently119MWspreadacross10differentprojectsactivelyunderdevelopment.Morethan67MWofthatcapacityisalreadypre-leased,likelyputtingtheNorthernVirginiamarketonpacetoreachorexceedtherecord-settingabsorptiontotalsofeachofthepasttwoyears.

Nearly76MWoftheexistingconstructionpipelinewilllikelybedeliveredinthesecondhalfof2017.ThelargestoftheseprojectsisCloudHQ’sMCC1datacenterinManassas,anchoredbya35MWtenantandwith8MWofspeculativecapacity.OtherdeliveriesexpectedlaterthisyearincludethefirstphaseofIronMountain’snewdatacenterinManassas,thefirstphaseCoreSite’sVA3inSterling,thefirstphaseofDigitalRealty’sBuildingLandsecondphaseofDuPontFabros’ACC9inAshburn.TheannouncedmergerofDigitalRealtyandDuPontFabroshasthepotentialforacombinedNorthernVAfootprintamongthetwoprovidersthatisfastapproaching400MW.

Northern Virginia

MarketactivityinSiliconValleyremainsrelativelyhandcuffedbyalimitednumberofavailablewholesaleoptionsandscantopportunitiesfortheadditionofnewsupply.Thevacancyrateremainednearitshistoricallowatmidyear,inchingupto5.3%from4.5%inQ42016andrepresentingonly9MWofexistingavailablewholesalecapacity.Morethan50%ofthisvacantcapacityisavailableinsecond-generationfacilitiesthataremorethanfiveyearsoldandoftenviewedastechnologicallyobsolescent.

Netabsorptiontotaled12MWinH1,nearlyallattributabletothedeliveryofCoreSite’sSV7facilityinSantaClara.Thefacilitywasanchoredbytwosubstantialpre-leasesandtheproviderhasformerlysaiditplannedtoreserveanadditional2MWofcapacitytooperateunderitsretail/colocationmodel.Asimilarpre-leasescenarioholdstruefortheremainingpipelineinSiliconValley:Thereare

currently29.5MWunderway;however,thatcapacityisalready100%committedtocustomers.ThenextavailablespeculativelybuiltnewcapacityisbeingdeliveredbyVantageDataCentersin2018.Vantageisstrategicallypositionedasoneofthefewoperatorstoaddnewwholesalecapacityinthenear-term.Inthemeantime,tenantslookingforwholesalespaceinthemarketmayberesignedtofuturesublet/re-letopportunitiesthatmaybeavailableinlate2017andinto2019.

ThebigheadlineinH1wastheacquisitionofVantageDataCentersbyaconsortiumledbyDigitalBridgeforanestimated$1.2billion.TheacquisitionincludesVantage’sexisting18-acrecampusandnine-acreexpansioninSantaClara,aswellasa68-acrecampus(withanexisting6MWfacility)inQuincy,WA.

Silicon Valley



TheNewYorkTri-Statedatacentermarketcontinuestoexhibitpositive,albeitslow,momentuminitstransitionandrecoveryfromaseriesofsluggishyearsintheaftermathofSuperstormSandyin2012.Therewasroughly2.9MWofpositivenetabsorptioninH1,loweringwholesalevacancyto18.2%atmidyear.

Post-SuperstormSandy,marketdynamicshaveshiftedtosmallerretail/colocation-centricdeploymentsthathavebeenlargelydrivenbyriskmitigationconcernsfocusedondiversefacilitydeploymentsandgeographicdiversitywithintheregion.ThemostsignificantrecentmarketactivityhasbeenheavilycenteredonahandfulofM&AsthatunderscoretheshiftingdynamicsoftheTri-Statemarket:

• QTSRealtyTrustacquiredDuPontFabros’NewJerseydatacentercampusinPiscataway,N.J.lastyear.Theoperatorannouncedastrategicplantotargetsmallercolocationdealsandoffermanagedservicestolocalcompanies

lookingforsmallerpoints-of-presenceintheTri-Stateregion.ThisisinsharpcontrasttoDuPont’sstrategyoffocusingonlarger-scale,multi-megawattdeals.

• Earlythisyear,traditionalwholesaleproviderCyrusOneacquiredSentinelDataCenters,whoseSomerset,N.J.facilityhas140,000sq.ft.ofraisedfloorspacewiththecapacitytoaddanadditional15-to-20MWofwholesalecapacity.CyrusOneenteredtheTri-Stateregionin2015withitsacquisitionofcolocationproviderCervalis,withfourfacilitiestotaling125,000sq.ft.ofheavilyretail-centricoperatingspace.

MarketgrowthisbeginningtooccurnorthofManhattan,particularlyinConnecticutandOrangeburg,N.Y.InterestinthesenewsubmarketsisbeingdrivenbyincreasingdemandforbusinesscontinuityanddisasterrecoveryinareasthatofferbothgeographicandutilityproviderdiversitytoNewYorkandNewJersey.

New York Tri-State Region



TheMinneapolis/St.Paulmarketformulti-tenantdatacenterscontinueditsrapidgrowthin2017.Marketdemandforthird-partydatacenterspacehasbeenatunprecedentedlevelssincemid-2015,whenanumberofnewprovidersandfacilitiesenteredthemarket.Demandhasremainedstrong,with3.2MWofnetabsorptioninthefirsthalfof2017—onpacetomeetorexceedrecentannualtotalsof6MW.

Whiletheexistingsupplyofavailablewholesaleandcolocationspaceremainsrelativelyhighdespitethesignificantabsorptionlevelsofthepastseveralyears,thisislargelyduetothecompletionofadditionalnewpods/phaseswithinexistingbuildings.Nearlyalloftheprovidersthatdeliverednewdevelopmentprojectstothemarketin2015-16areexpandingcapacitytokeepupwiththesteadydemand.Therearecurrently5.4MWactivelyunderconstructioninthemetroarea,withanadditional16.7MWplanned.

However,Minneapoliswillremainatenantfavorablemarketinthenear-termandendusersleasingdatacenterspacewillcontinuetohavesignificantleveragethrough2018untilabsorptionfurthercatchesupwithsupply.Untilthen,downwardpressureonpricingandincreasedconcessionsfromthird-partyproviderswillcontinuetobethenorminthismarket.

Themarketforthird-partydatacenterspaceinMinneapolis/St.Paulcontinuestoevolve,withmanycompaniesnowchoosingtoleaseasopposedtobuild,evenforsingle-tenantsolutions.Minnesota’sdatacentertaxincentiveprogramhashelpeddrivethird-partydemand,providingcompanieswithanabatementorrebateofsalestaxonsoftware,hardwareandpowerovera20-yearperiod.Anestimated$100millionhasbeenrebatedtodate.

Secondary & Emerging Market Highlights

Minneapolis

Atlanta

Primary Market Insights

ActivityintheBostondatacentermarketremainssubdued,asthehighcostofpower,elevatedtaxratesandlackofdatacenterincentivescontinuedtolimitdemand.Themarketregisteredapproximately1MWofnetabsorptioninH1,primarilybyusersfromthefinancialservices,e-commerceandtechnologyindustries.Leasesinthefirsthalfoftheyearaveragedapproximately150kW.Vacancystandsat24.4%forwholesaleproduct.

DevelopmentintheBostonmetroisevenlysplitbetweenCoreSiteandMarkley.CoreSitewilldeliver1.2MWover12,000sq.ft.ofraisedfloorinQ42017atitsSomervillesite.Markleywillalsodeliver1.2MWover12,000sq.ft.ofraisedfloorinLowell.Neitheroftheseprojectshasrecordedanypre-leasing.

Boston



TheCharlotteandRaleigh-Durhamareaisasignificantemergingdatacentermarket.OverallexistingcapacityinNorthCarolinahasincreasednearly19%since2016andcurrentlystandsat50.9MW.Positivenetabsorptionofnearly10.5MWsincethen(6.4MWinRaleighand4.1MWinCharlotte)representsanearly40%increaseintotaloccupieddatacenterspace.Whilethecurrentvacancyrateseemselevatedonthesurface(29.5%),itrepresentsonly15MWofexistingavailablecapacity.

Previouslybifurcatedintotwodistinctsegments—singletenant/owner-occupieddatacenterhubsandsmallretail/colocationfacilitiesdrivenbylocalhealthcareandfinancialservicesrequirements—themarketistransitioningintoaviablenationalmulti-tenantleasingdestinationcenter.

Recentacquisitionactivityunderscoresthechangingnatureofthemarket.Charlotte-basedPeak10—thelargestretail/colocationproviderinNorthCarolina—announcedinJunethatitwas

acquiringnationalretailoperatorViaWestfromShawCommunicationsfor$1.68billion.TheacquisitionissignificantinthatitexpandsPeak10’sfootprintfromregionaltonational,addinglocationsinMinneapolis,Dallas,Denver,SaltLakeCity,LasVegas,PhoenixandPortland.NationalwholesaleoperatorCyrusOnealsoenteredtheNorthCarolinamarketthisyearwithitsacquisitionofSentinelDataCentersfor$490million.ItsNC-1facilityintheResearchTriangleParkinRaleigh-Durhamhasapotentialbuildoutof200,000operationalsq.ft.androughly23MWofcriticalITload.

AsidefromtheCharlottearea’scentralEastCoastlocationandabundanceoflow-costlandavailablefordevelopment,severalothercontributingfactors—low-costpower,attractivedatacenterincentivesandDukeEnergy’sinvestmentinrenewableenergy—willlikelymakeNorthCarolinaanattractivedestinationforbothnationalandregionalenterprisedatacenterrequirements.

North Carolina

TheHoustondatacentermarketremainsrelativelystalled,withonlyminimalactivityandnodealsofsignificantsizeoccurringinthefirsthalfof2017.Vacancyamongwholesaleproductstandsat21.4%andretail/colocationinventoryremainsanestimated30+%vacant.Currentdemandinthemarketiscomprisedofusersfromthetransportationandhealthcaresectors,reflectiveofthelocalpullbackintheenergy,financialservicesandtechnologysectors.

DevelopmentinHoustoniscurrentlylimited,withTRG’s3MW,10,000-sq.-ft.facilityinSpring,TXcurrentlytheonlyprojectactivelyunderconstruction.Theprojectisexpectedtobecompletedlaterthisyear.PendingprojectsincludeStreamDataCenters’additional4.8MWinplannedcriticalloadforitsthirdandfinal10,000-sq.-ft.podandCyrusOne’s209,000-sq.ft.poweredshellatitsWestIIIfacility,whereithasalreadybuiltapproximately5MWover52,932sq.ft.ofraisedfloor.

Houston



TheAustinandSanAntoniomarketsremainrelativelysluggish,withnosignificantleasingdealsoccurringinthefirsthalfof2017.Therearecurrently15MWofexistingdatacentercapacityavailablealongtheInterstate35corridor,representingavacancyrateof15.3%.Thesetwomarketsarebifurcatedalongdemandsegments,withSanAntoniodrivenbylargewholesaleandenterprisedeploymentsandAustin’sdemandderivedfromsmaller,localizedretail/colocationrequirements.Austin,inparticular,isoneofthestrongestandfastest-growingtechsectormarketsinthecountry,withanumberofSiliconValleyfirmsmigratingtothemetroareatoescapethehighcostoftheBayArea.

Despitetheoveralllackofactivity,thedevelopmentpipelineisactive.InSanAntonio,CyrusOnecompleteditsfullypre-leased,24-MWSanAntonioIIIfacilityearlierthisyear,andiscurrentlyconstructingits60,000-sq.-ft.,12-MWSanAntonioIVdatacenter.InAustin,CyrusOneplanstobuildoutitsAustinIIIfacility,whichiscurrentlyasingle-story,retrofitfacilityoffering9MWofcriticalloadover67,000sq.ft.ofraisedfloorandiscurrently19%occupied.Atfullbuildout,AustinIIIwillhouse18MWofcriticalloadand128,838sq.ft.ofraisedfloor.FollowingthesuccessofitsexistingAustinfacility,DataFoundryisplanningasecondfacilitywith165,000sq.ft.ofraisedfloorand16.5MWofcriticalpower.

Austin/San Antonio



Columbusisanemergingdatacentermarketwithsignificantmomentum.Inthepast10years,themarkethasevolvedfromalocationofchoiceformanycorporateenterprisedatacenterstooneoftheworld’stoplocationsforInternetcloudoperations.Columbushasnowgainedtheattentionofnationalcolocationdatacenteroperators.Itsreliablepowerandrobustdatafibernetwork,itsgeographicproximitytoabouthalfoftheU.S.populationandtheresultinglowerlatency,anditspro-businessenvironmentwithafavorabletaxclimateisbolsteringColumbus’standingasoneofthehottestdatacentermarketsinthecountry.

ColumbusisstrategicallylocatedinoneofthehighestconcentrationareasofdatatransmissionandstorageintheU.S.,effectivelyservingasanon-ramptolong-haultransmissionnetworks.

HyperscaleCSPsandcontentprovidersaremovingtothe“Edge”toprovidefasterdownloadsoflargeamountsofcontentandtheColumbusregionhasbecomeasignificantfocalpoint.

ThecolocationdatacentermarketinColumbusisstillevolving.CologixandExpedientrecentlydevelopedTierIII-typefacilitiesthatareconcurrentlymaintainable.CologixacquiredthecolocationdatacenterbusinessandtherealestateofDatacenterBZin2014,andwillsoondelivera160,000-sq.ft.,12MWcolocationdatacentertoitscampus.ExpedientconstructedPhaseIofa60,000-sq.ft.colocationdatacenterin2015.Thisnewdevelopmentactivityrepresentsapositivedirection,butthereisstillagrowingneedforwholesaledatacenteroptionsinColumbus.

Market to Watch: Columbus

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

To learn more about CBRE Research, or to access additional research reports, please

visit the Global Research Gateway at www.cbre.com/researchgateway. Additional U.S.

Research from CBRE can be found here.

Pat LynchSenior Managing DirectorData Center Solutions

[email protected]

Spencer G. LevyHead of Research and Senior Economic Advisor Americas

[email protected]:@SpencerGLevy

Jeff WestDirector of Research & AnalysisData Center Solutions

[email protected]:@JeffWestCBRE

Jeremy MeyersBusiness Development ManagerData Center Solutions

[email protected]

Contacts


Learn more about about CBRE's Data Center Solutions Team by visiting us at:

cbre.com/datacenters

Follow us on Twitter @cbredatacenters

and on LinkedIn - CBRE Data Centers

http://www.cbre.com/research-and-reports

http://www.cbre.us/research/Pages/US-Reports.aspx

mailto:pat.lynch%40cbre.com?subject=

mailto:spencer.levy%40cbre.com?subject=

https://twitter.com/SpencerGLevy

mailto:jeff.west%40cbre.com?subject=

https://twitter.com/jeffwestcbre

mailto:jeremy.meyers%40cbre.com?subject=

https://www.cbre.com/real-estate-services/real-estate-industries/data-center-solutions

https://twitter.com/cbredatacenters

https://twitter.com/cbredatacenters%3Flang%3Den

https://www.linkedin.com/company/cbre-data-centers

strong fundamentals lead to record- setting … · strong fundamentals lead to record-setting...

Documents