2022 Data Center Leasing Rises 40%; Vacancy at Record Low

(Illustration courtesy CBRE, Dallas.)

CBRE, Dallas, said North American data center leasing reached record levels and vacancy fell to a record low in 2022, but constraints on building new data center capacity could hamper the sector’s continued growth.  

The company’s North American Data Center Trends Report found tight market conditions and escalating energy and construction costs caused primary-market average asking rents to increase 14.5% year-over-year to $137.90 per kW, the first year-over-year increase in pricing since 2017.

The seven primary U.S. data center markets logged 686.9 megawatts of net absorption, up nearly 40% year-over-year. Despite a 17% increase in supply, vacancy fell to a record-low 3.2%. Two-thirds of the net absorption occurred in the first half of the year, as power and land constraints in certain markets, as well as construction delays, weighed on activity in H2 2022.

“Data center leasing slowed in the second half of 2022, but this was driven purely by a lack of available space and power constraints,” said Pat Lynch, CBRE Executive Managing Director and Global Head of Advisory & Transaction Services. “Demand from enterprise users and cloud service providers remains very strong, particularly as companies continue to adopt hybrid work strategies and prioritize private cloud networks.”

Northern Virginia remained the most active data center market with net absorption of 436.9 MW, with the market’s vacancy rate falling to under 1%, despite significant power constraints. Dallas, Silicon Valley, Chicago, Phoenix, New York Tri-State and Atlanta comprise the other primary U.S. data center markets.

“Northern Virginia has challenges with power availability over the next few years. This will benefit other markets that are expanding power capacity,” said Gordon Dolven, Director of Americas Data Center Research with CBRE. “Atlanta, for example, has more than 1 gigawatt of planned capacity in the works, with new data center operators entering the market and competing with industrial developers for available land.”

Northern Virginia (371.5MW) accounted for 65% of new primary-market supply delivered in 2022. Other markets with notable supply growth included Silicon Valley (66.0MW), Hillsboro, Ore. (59.0MW), Toronto (44.0 MW) and Phoenix (37.5MW).

The report noted equity and debt investors remained interested in the resilient data center asset class in H2 2022, despite a constrained capital markets environment. They were attracted to the strong industry fundamentals of positive rental rate growth, historically low vacancy and record demand.

However, H2 2022 saw further price discovery and fewer offerings by sellers, as the market adjusted to the widening of investor returns. As a result, overall sales volume for data center assets declined approximately 20% year-over-year.

“Looking forward to 2023, we anticipate an uptick in enterprise sale-leaseback opportunities as users raise capital,” the report said. “We also anticipate partial interest trades for stabilized product, where experienced operators require additional capital to fund future developments.”