Data Center Demand Soars Amid Historically High Preleasing

Data center operators are forecasting their biggest year this year – and at least for the next three years – as preleasing activities for campuses that are not built yet are piling up, according to a report from JLL.

Brad Molotsky, Partner in the Real Estate Practice Group at Duane Morris, tells GlobeSt.com that notwithstanding the global impact of the war in Ukraine, supply chain logistics issues and inflation, data center development and investment will likely continue at a clipping pace for the remainder of this year.

JLL said it expects supply chain challenges to persist for the next 24 months.

Despite interest rate hikes, M&A activity for H1 2022 totaled $24 billion while real estate investors poured more than $2.8 billion into acquisitions of existing assets as well as development sites, JLL reported.

Driven by the historically high volume of preleasing activities, JLL said that the US market over the first half of this year nearly eclipsed all of last year’s, reaching 95% of 2021’s full-year demand.

And why not? Enterprise organizations continue to invest in cloud infrastructure services, driving momentum within the data center development pipeline.

Further creating demand are hybrid work schedules (55% of office workers globally are now working in a hybrid model) and “unforeseen growth in personal usage of social media, online gaming and streaming applications,” JLL said.

Power and Land Could Slow Pace

The pipeline itself is what’s slowing data center development.

Andy Cvengros, JLL Managing Director, said in a release that macroeconomic challenges such as power and land availability in primary markets could slow data center construction this year.

“This may force developers to look outside of traditional markets; however, the sustained demand to optimize the IT footprint through colocation and cloud utilization will support data center market fundamentals and continued investment, especially for long-term investors,” according to Cvengros.

Molotsky said that looking slightly backward into 2021, the data center market space saw record-setting mergers and acquisitions activity and continued compression in cap rates to the mid-to-high 3% range.

“This is pretty stunning given the overall global marketplace,” he said. “Part of this continued compression is being driven by the lack of available supply of product, continued difficulty in obtaining development approvals and logistics challenges for certain supplies and equipment.”

Molotsky said that while the design challenges noted above remain relevant and important, the demand for more space, investor interest in data center space and the amount of capital flowing into the sector “will put pressure on timing, delivery and advanced planning. Integrated design will remain a key component of a successful on-time, on-budget delivery.”

Columbus an Emerging Data Center Hub

Yardi’s CommercialEdge points to Columbus as an emerging data center hub, one that could pick up the slack from traditional markets.

Despite rising interest rates that increase the cost of capital for developers and a slowdown in e-commerce growth, ground is still being broken on new industrial projects at a ferocious pace.

Nearly 200 million square feet of space have already been delivered this year, and the amount of space under construction increased by 28 million square feet in June.

One of the larger pipelines in the nation is in Columbus, which not only has a strong logistics presence but is an emerging data center hub, as well.

Ressler said that what makes Columbus attractive is its standing as a regional economic center and one of the largest cities in the Midwest. Ohio’s tax incentives are helping, to boot.

The largest projects under development in the market are two separate 1.5 million-square-foot data centers owned by Google, with the search engine behemoth investing more than $1 billion in the area.

Other Challenges, Including ‘ROT’

In addition to a tight supply of product, Molotsky said that further challenges include:

• Designing the space for redundant sources of power to maintain HVAC specifications on a 24/7 basis;
• Increased need for physical, on-site security to avoid data tampering and maintain data integrity – how one addresses this as a developer and as a user/tenant of space is typically a subject in the lease arrangement;
• Increased focus on the Internet of Things (IoT) and avoidance of cyberattack potential via a buildingwide integrated system of physical checks and personnel vetting will continue to prove to be a challenging but critical necessity;
• Designing the physical infrastructure of the building to enable real-time monitoring of heat and air humidity as well as data integrity; many are using DCIM software to enable real-time data management – DCIM is short for “data center infrastructure management,” which provides for on-site and off-site real-time review of key performance indicators in the IT infrastructure including power usage and cooling demands; balancing power consumption needs with the integrity mandate is often tricky, which is why real-time monitoring and action will prove critical to intensive utilization of space;
• Data management – how data center owners handle irrelevant data (often called ROT – or “redundant, obsolete and trivial”) and what the users and building owners do with this data will prove to be an ongoing challenge; one study estimated that by 2021 and beyond, this type of data could likely cost $3.3 trillion dollars annually in storage costs if left unchecked;
• Life cycle management – focusing on hardware management and end-of-life-cycle replacement for servers, power and HVAC distribution systems with a plan for this replacement will prove to be an integral part of any data center plan, which is often less of a focus of annual planning than it should be; and
• System layout – focusing with the client users on the layout of their racking systems, flooring systems and power delivery for HVAC to avoid wasteful and inefficient use of energy is a large focus of many data center developers. BIM (short for “building information modeling”) development technology may be used to assist the architect, developer and contractor to optimize delivery, space efficiency and timing regarding the integration of building systems.