Global CRE firm JLL has found that the data center sector is experiencing record growth thanks to the ongoing expansion of artificial intelligence (AI) and machine learning.
The first half of this year saw record activity on the part of hyperscalers, financial firms, healthcare companies and other major enterprises that rushed to secure data center space. On a regional basis Phoenix and the Northwest have outpaced other areas such as Northern Virginia. JLL research is anticipating secondary real estate markets, including Columbus, Salt Lake City, Reno and Austin, to continue to support the overflow from the constrained primary markets.
“The data center industry is continuing to experience explosive growth in demand which is leading to completely sold-out primary markets, secondary market expansion and the development of newer tertiary markets,” said Andy Cvengros, managing director, JLL. “Major markets and most secondary markets have reached a state of supply and demand imbalance; the development timeline for new data centers has grown to three to five years – or more in some cases. If you want a new data center within that timeframe, start planning for it now, as we don’t see any sign of this demand slowing or the power situation getting any better.”
Most of the supply expected to be delivered in the latter half of 2023 and 2024 has been pre-leased or is under exclusivity, resulting in limited options for users, JLL said.
Primary markets already have a limited inventory of colocation space, leading data center operators to increase pricing by up to 20-30%.
“AI implementation requires significant computing power and resources, which translates to increases in leasing,” said Kari Beets, senior manager, research, JLL. “AI needs also require higher power densities which require additional infrastructure in most data centers.”
AI drives demand for data centers
Along with cloud adoption, AI is driving hyperscale expansion.
AI models are changing data center infrastructure, with some large requirements driving densities to 50-100 kW per rack, JLL said in its latest research. Many colocation providers have adjusted the voltage delivered to the floor to 415 volts, which can reduce the upfront cost of delivering power to these high-density clusters.
Major cloud service providers are growing rapidly to support new AI requirements, and with that growth so is the need for more computing power that makes the ability to find space all the more challenging. JLL found that this has led to a significant surge in leasing in the second quarter of 2023.
Investors flock to support progress
Even with a high interest rate environment, data center lender and investor demand remain strong, a bright spot for the capital markets. The sector is still attracting a variety of lenders, including life companies, banks, debt funds and CMBS/SASB, and the record-setting M&A activity of the last two years in the data center sector continues, with a flurry of recent major announcements, the Chicago-based firm outlined.
With the 10-year treasury rates rising, fixed rate spreads have increased by over 300bps in three years, directly impacting cap rates and asset valuations, JLL executives pointed out.
EBITDA multiples have been on the rise too. In the trailing 12 months these multiples have averaged 26.5x vs. an average of 23.2x since 2017, according to Carl Beardsley, managing director of capital markets at JLL.
