Factors Shaping the Future of Data Centers

Article originally posted on HERE on April 18, 2024

A report by Colliers discusses a sector impacted by hyperscale players and more capital

Data centers have been a focal point of commercial real estate commentary and investment in recent years. However, this is a continually evolving sector, with Colliers’ report, “2024 Data Center Marketplace: The Evolution of Artificial Intelligence: Shaping the Future of Data Centers,” discussing vacancies, capital and hyperscalers.

A Record-Setting Year

The report noted that U.S. vacancy in 2023 was 1.7%, while markets including Atlanta, Dallas, Northern Virginia and Phoenix “led the way for megawatt absorption.” Demand was also strong in secondary markets.

The past year will also be known as “the coming-of-age year of artificial intelligence (AI),” the report explained. Though in its early days, programs like ChatGPT and Dalle ” offer a glimpse of AI’s versatility,” the report noted.

On top of this, the need to scale resources on demand is spurring hyperscale providers like Amazon Web Services, Google Cloud and Microsoft Azure to increase their total North American megawatt output.

However, there are headwinds, notably increases in capital costs and concerns about entitlement and power delivery. Labor shortages, delays in crucial infrastructure components, and rising costs have also been issues that have impacted the development of much-needed space.

The Outlook

The report listed five trends that will impact the sector in the coming year:

#1 — Continued pricing increases. The increase in demand and continued lack of supply (due to increased construction and capital costs) will mean high rent prices, though “favorable yields for operators,” the report noted.

#2 — A focus on new energy sources. With power and sustainability continuing to be ever-growing concerns, data centers will consider different energy sources like nuclear power and natural gas.

#3 — Growth in land banking. The inability or reluctance of some municipalities to deliver power to a data center site will lead some developers and operators to land bank parcels to be powered up in the future. At the same time, the report pointed out that operators need to make a strong case for closing on non-tenanted property.

#4 — Joint venture increases. Because of liquidity issues, the report forecasted that joint ventures would help provide capital and “expand opportunities that may otherwise be unfeasible.”

#5 — A focus on new markets. The report noted that California and Oregon face challenges providing the power needed for new campuses. More attention will be directed to states like Arizona and Nevada. “Hyperscalers will also look to third-party providers who can deliver in 24-36 months to speed up their time to market,” the report added.