Data centers stay hot, widening supply-demand imbalance

Developing technologies, such as artificial intelligence, continue to boost subsector

One of alternative commercial real estate’s most hyped subsectors continues to run hot, with data center demand during the opening six months of the year reaching new heights, according to a recent report from JLL.

With finance, health care, gaming and many other business sectors clamoring for more data storage, the first half of 2023 saw record absorption in data center properties. Northern Virginia, which has long been the largest market when it comes to data center space, saw 184.0 megawatts (absorption in data centers is measured in electricity consumption) of net absorption in H1 2023, slightly off record levels. Other markets are on the rise, with Phoenix and the Northwest surpassing Northern Virginia with 194.5 MW and 185.9 MW of absorption, respectively.

With such growth, however, comes larger challenges in the form of supply-demand imbalance. Most primary and secondary markets have now reached a heavy state of disparity between demand and supply, with current and near-term inventory incapable of meeting demand. This is leading to a shortage in co-location space and, subsequently, an increase in prices. Secondary data center markets, including Columbus, Ohio; Salt Lake City; Reno, Nevada; and Austin are expected to pick up some of the overflow in extremely limited primary markets, but they too are experiencing an uneven equilibrium.

Adding to the strain is that much of the supply to be delivered in the second half of 2023 is already either preleased or under exclusivity. The same goes for much of the anticipated supply in 2024, leaving users who haven’t jumped into the market well in advance set to find themselves with limited options.

The surge in artificial intelligence development is leading to a substantial increase in demand for computing power and resources, putting data centers even further into the spotlight. JLL reported that even with the rise of interest rates, both lender and investor demand for data centers remained a “bright spot,” suggesting an optimistic outlook for the property type even as commercial real estate struggles through a tough year.


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