Investment in Data Center Sector Reaches Record Levels in 2017

Investment in the U.S. data center sector reached record levels in 2017, according to the latest U.S. Data Center Trends Report from CBRE. 2017 investment totaled more than $20 billion (inclusive of all single asset, portfolio and entity-level/M&A transactions), surpassing the volume for the three previous years combined.
 
2017 investment activity was heavily weighted by several large entity-level transactions, as data center providers and users sought to monetize certain assets and migrate to hybrid IT environments. For example, Digital Realty acquired DuPont Fabros and its 12 assets and BC Partners/Medina Capital/Cyxtera Technologies purchased CenturyLink’s 57-asset data center portfolio.
 
Other report findings include:

• Heightened demand from multi-megawatt hyperscale cloud users led to record wholesale positive net absorption in 2017
• Accelerating data needs from hyperscale providers and elevated enterprise IT spending trends are driving demand for hybrid cloud architectures
• Northern Virginia, Silicon Valley, Dallas/Ft. Worth, Chicago and New York Tri-State saw the most leasing activity in 2017

“The U.S. data center sector continues to thrive, evidenced by record investment volume and positive net absorption, and elevated levels of new supply across the major markets,” said Pat Lynch, senior managing director, Data Center Solutions, CBRE. “We have strong expectations for 2018 and beyond as operators, investors and end-users all seek opportunities to maximize efficiencies, enter new markets and utilize new service offerings.”
 
Top U.S. Data Center Markets
After largely sitting on the sidelines in the first half of 2017, hyperscale cloud users returned to action in H2 2017, resulting in 267 megawatts (MW) of wholesale positive net absorption in the seven major U.S. data center markets—a record level, and up significantly from 2016’s 191 MW.  
 
Northern Virginia remained the most active data center market in the world, with net absorption of 121 MW in 2017, 80 MW of which occurred in the latter half of the year.
 
Rounding out the top seven most active markets:

• Silicon Valley (62 MW)
• Dallas/Ft. Worth (36 MW)
• Chicago (31 MW)
• New York Tri-State Region (7 MW)
• Phoenix (6 MW)
• Atlanta (4 MW)

Northern Virginia, the sector’s largest market in the world, added 85 MW of supply in H2, and will grow larger still, with an additional 86 MW under construction as of Q4 2017. Other markets with significant construction activity include:

• Dallas/Ft. Worth (42 MW)
• Phoenix (28 MW)
• Silicon Valley (21 MW)

Hybrid IT Solutions
Enterprise end-users continue to pivot from owning their own facilities toward hybrid solutions (a combination of cloud services, third-party colocation and owned, on-premise infrastructure). Large-scale data center operators have adopted to this trend by instituting hybrid infrastructure designs, rapidly rolling out new services to attract new users and expanded business from existing users.
 
“As the data center market matures, its success will depend on how well IT platforms integrate with real estate needs,” said Mr. Lynch.
 
Investor Interest
Another recent CBRE report, the 2018 Americas Investor Intentions Survey, noted strong interest in the data center sector from commercial real estate investors, with the sector seeing the largest increase in the share of respondents actively pursuing investment among “alternative” sectors (from 6 percent of respondents in 2017 to 13 percent in 2018). Data centers also had the largest positive differential between the share of respondents who are actively pursuing the sector and the share already invested in it (9 percent), implying growing interest in this asset type.
 
“While traditional data center real estate pricing has stabilized over the past three years, we expect slight near-term increases in pricing as the sector continues to see increased interest from the investment community and providers build out service offerings that mesh users’ real estate and technology needs,” Mr. Lynch added.