Surge of New Capacity Expected in Top US Data Center Markets This Year

Hyper-scale cloud providers’ hunger for server capacity in top US data center markets over the last few years has created a shortage of supply, but, according to a new market report by the real estate brokerage CBRE, that tightness may ease up this year, as developers complete construction projects started in 2016.

Unclaimed data center space that’s commissioned and ready for servers to be moved in is extremely tight in major US markets at the moment. According to CBRE, the vacancy rate is 4.6 percent.

However, a whole lot of new speculative development is underway and due for delivery this year. In other words, developers are building a lot of data center space without leases signed ahead of time.

By CBRE’s estimate, 271MW of capacity is currently under construction in major markets. More than 160MW of it is being built speculatively.

Most of the construction is happening in Northern Virginia (121 MW). A lot of construction is also taking place in Dallas-Fort Worth and Silicon Valley, among other markets.

See also: Sabey Launches First Building in Booming N. Virginia Data Center Market

These numbers do not necessarily signal an upcoming drop in value of data center space, according to the brokers:

“Even with the addition of much-needed new supply, market conditions in nearly all major data center markets should remain landlord-favorable in 2017 from a supply-demand balance perspective.”

Another big source of new supply is on the rise.

In a statement, Pat Lynch, senior managing director for Data Center Solutions at CBRE, said he expected traditional enterprises to continue moving systems out of data center facilities they own and into the many flavors of outsourced data centers (cloud, colocation, or managed services).

That will leave a lot of enterprise data center facilities available for purchase. This trend picked up in 2016, when total sales volume for data center assets was $1.78 billion. The average sale price per square foot was $275, according to the report.

Read more: 2016 Was a Record Year for Data Center Acquisitions, but 2017 Will Be off the Charts

The total does not include the two large portfolio acquisitions announced in 2016 but not yet closed: Equinix’s acquisition of Verizon data centers in the Americas, and the acquisition of CenturyLink’s colocation business by a joint venture between BC Partners and Medina Capital.

Lynch said corporate data center assets coming on the market this year are “not likely a supply-side risk to the multi-tenant market.” However, the assets that are near major population centers and have robust network connectivity characteristics will potentially see strong demand and pricing.