Where the Next Generation of Data Centers is Heading

There is a new goldrush under way in the United States. But this time prospectors are in desperate search of locations with the necessary ingredients to power the data centers vital for the new age of artificial intelligence. And where such centers already exist, rental rates are spiking.

“Data center operators are prioritizing power availability, rather than selecting markets based on location, connectivity, water and land pricing,” CBRE reports. “Data center providers and customers continue acquiring land in strategic markets, with lack of suitable sites causing bidding wars for offerings that meet established power and fiber profiles.”

The pace of construction is remarkable. Despite a lack of readily available power and chokeholds in the electrical infrastructure supply chain, a record high of 2,2876 megawatts was under construction in primary markets – a 25% year-over-year increase, CBRE reported. Chicago led the nation with a 125% increase in data centers under construction.

“Supply in primary markets increased by 491.5 MW (12%) in H1 2023 compared to H2 2022 and by 738.2 MW (19.2%) year-over-year.”

CBRE identifies the eight primary data center markets in the U.S. as Northern Virginia, Dallas-Fort Worth, Silicon Valley, Chicago, Phoenix, New York Tri-State, Atlanta, and Hillsboro, OR – which saw its inventory grow 311% since 2020, far outstripping second-place Atlanta’s 91% growth rate in the same period.

Demand pushed up absorption in primary markets, while their overall vacancy rate fell to a near-record 3.3% — sinking to a national low of 0.94% in Northern Virginia. Preleasing was prevalent, up 70%. Indeed, hyperscalers – high-capacity data centers usually located in cities – are securing space 24-36 months in advance of delivery, CBRE noted. 

Leasing rates shot up for space in colocation centers — data centers that rent equipment, space and bandwidth to retail customers. “The average asking price across primary wholesale colocation markets for a 250-500 kW requirement increased by 72% in H1 2023 to $147.81 per kW per month,” CBRE stated, predicting further increases this year. 

“Operators are eager to end leases in power-constrained markets so they can re-lease at high prices. Assets with assumable debt present an attractive solution.”

Some bargains can be found where operators own legacy assets with vacancy. However, vacant and second-generation enterprise data center acquisition remains increasingly difficult to underwrite, especially those built for a specific use that are not easy to modify.

CBRE also sees opportunities for rural areas with fiber connectivity. “As developers get more interested in rural areas for AI training projects, new ‘last-mile’ fiber connections will be key. Traditional network architecture will continue to be replaced by ultra-high capacity, low-latency, flatter and more resilient designs – each requiring deep-fiber-based components,” the report noted.

CBRE cautioned that data center operators will have to overcome challenges like calls to decrease carbon emissions as well as supply constraints and monitoring by regulators. But it predicted demand will remain resilient, especially as AI usage grows and new uses are found. It cited ChatGPT, which it said surpassed 100 million users at record speed.