CBRE Report: Southern California Saw 23% Increase in Data Center Leasing in 2018

Cloud User Demand Drives U.S. Data Center Leasing to Record Levels in 2018

Los Angeles – Driven primarily by demand from enterprise companies in the entertainment and financial industries, as well as online content providers, Southern California saw a 23-percent year-over-year increase in data center leasing activity in 2018, according to CBRE’s latest U.S. Data Center Trends Report.

Southern California saw 10.3 megawatts (MW) of net absorption. Given 10.7 MW of new capacity delivered in 2018, the market’s vacancy rate rose 140 basis points to 15.2 percent. The average deal size in 2018 was under 250 kilowatts and was connectivity driven. CoreSite remains the region’s inventory leader and has more than 24 MW of capacity under development or planned, primarily at its LA3 project that is slated to deliver 20 MW.

National Trends

The seven primary U.S. data center markets saw 303 MW of net absorption in 2018, up more than 16 percent from 2017’s then-record total. That absorption nearly eclipsed the 322 MW of capacity added last year. Northern Virginia, the largest data center market in the world, accounted for 58 percent of net absorption in the primary markets.

“We are closely watching supply and demand trends across the U.S. data center market in 2019 and beyond, particularly as data consumption—driven by the adoption of big-data analytics, 5G, gaming, streaming services, edge computing and the internet of things— continues to drive growth,” said Pat Lynch, senior managing director, Data Center Solutions, CBRE. “Meanwhile, we’ve seen robust construction activity as operators try to position themselves to rapidly deliver facilities within users’ often-tight schedules.”

Top 10 Most-Active Markets:
Northern Virginia 175.5 MW
Southern California 10.3 MW
Phoenix 41.6 MW Atlanta 8.2 MW
Dallas-Fort Worth 38.6 MW
Boston 5.7 MW
Silicon Valley 25.1 MW
Denver 4.7 MW
Chicago 10.7 MW
Austin/San Antonio 4.1 MW 

Strong demand has resulted in more than 500 MW of capacity under development in the primary U.S. markets, up significantly from the 228 MW underway at the end of 2017. Northern Virginia accounts for two-thirds of the current construction activity, primarily due to large requirements from cloud users. With 336.9 MW under construction, Northern Virginia’s pipeline is larger than the existing inventory of any U.S. data center market.

Other markets with significant construction activity include Phoenix, with 71.4 MW under construction at year end; Dallas-Fort Worth (37.4 MW); Houston (23 MW) and Atlanta (20.9 MW).

Capital Investment Trends

North American data center investment volume reached $12 billion in 2018, inclusive of single-asset, portfolio and entity-level transactions. While investment was down from 2017’s record-setting $20 billion, this was largely due to limited North American entity-level investment opportunities compared to 2017.

“Demand for data center investment has never been greater as aggressive foreign capital, institutional investors and infrastructure funds have started targeting the asset class,” said Kristina Metzger, San Diego-based senior vice president, CBRE Data Center Capital Markets. “As many of these groups enter the data center space, they are not only targeting direct investments, but also joint ventures, recapitalizations, and the outright purchase of data center operating companies.”

Added Mr. Lynch, “The data center market will continue to evolve and adapt to the demands of today and tomorrow. We expect to see a continued influx of capital into the sector from new investors and infrastructure funds seeking to diversify their portfolios, as well as increased investment and expansion in global regions previously untapped by providers and cloud users.”