North America Data Center Trends H1 2024

• Fueled by limited supply and strong demand, the average asking price across primary wholesale colocation markets for a 250- to 500-kW requirement increased by 6.5% in H1 2024 to $174.06 per kW/month.
• Atlanta led all primary markets with a 26% year-over-year increase in pricing, largely due to strong demand from AI providers.
• Rental rates are expected to increase further in H2 2024 due to rising construction and equipment costs.
• Increased demand for high-power computing is creating a significant price disparity between new data centers and legacy facilities. Many existing data centers lack the infrastructure to handle these demanding workloads, further limiting their appeal.

Figure 3: Average Asking Rental Rate with Y-o-Y % Change for Primary Markets 250-500 kW Requirement

• Investment activity was largely centered around new development, as strong tenant demand, rental-rate growth and higher yields continued to fuel a landlord-favorable market.
• Many potential sellers remained on the sidelines, anticipating that lower and more stable interest rates will eventually lead to lower capitalization rates.
• The bid/ask spread between sellers and buyers tightened due to expectations of lower interest rates later this year.
• CBRE expects increased investment volume and sales transactions in H2 2024.
• Digital Realty accounted for most of the investment activity in H1 2024. Cyxtera’s bankruptcy accounted for several other sales transactions.

• AWS closed on the first phase of its $650 million acquisition of Talen Energy’s nuclear-powered data center campus in Pennsylvania.
• PGIM and Equinix announced their $600 million joint venture development of a new Silicon Valley data center.
• Several notable transactions were either initiated or completed by Digital Realty:
  • The first phase of a $7 billion joint venture with Blackstone was completed on campuses in Paris, France and Northern Virginia. The joint venture also will include development of hyperscale data centers in Frankfurt, Germany.
  • A $400 million joint venture with Mitsubishi Corporation was announced for development of two 100% preleased data centers in Dallas.
  • A 75% interest in a Chicago data center was secured from GI Partners for $385 million.
  • A $271 million sale of Digital Realty’s interest in four data centers to Brookfield Infrastructure Partners was completed in relation to Cyxtera’s bankruptcy.

Figure 4: Inventory Growth of Primary Data Center Markets Since 2020

• Supply-and-demand dynamics continued to support strong rent growth, which is lowering going-in cap rates and creating opportunities for non-stabilized asset acquisitions with contracts below current market rates. Although the high cost of capital continued to apply upward pressure on cap rates and rates of return, demand for powered land remained strong.
• Determining value for sites that are suitable for data center development has never been more challenging due to the physical, legal and timing aspects of various powered land opportunities. This involves an evaluation of the grid infrastructure to determine how much power will reach the site and by when. The dearth of suitable sites has led to bidding wars for the few that meet certain power and fiber requirements.
• Construction lending activity remained strong, especially for preleased and stabilized assets on track to meet promised lease commencement dates.
• Many of the largest hyperscalers’ new developments will become operational over the next few years, with AI requirements driving further demand. This demand increased throughout H1, leading to significant debt financing by data center providers such as CoreWeave, Aligned and EdgeCore to fund new development.

Figure 5: Primary Markets Net Absorption, Preleasing & Under Construction

• Fiber network growth is expected to continue following hyperscale development in tertiary markets. For example, Mt. Pleasant, WI, Boise, ID and Cheyenne, WY have all seen hyperscale development in recent years, followed by active or planned network deployments. Networks that emerge due to hyperscale presence are typically purpose-built, long-haul or medium-haul and are deployed underground.
• Electric cooperatives, covering 56% of U.S. landmass, are accelerating their expansion into the broadband market as part of a broader strategy to enhance internet access and improve grid management. As of March 2024, more than 25% of U.S. electric co-ops have deployed broadband services by leveraging existing infrastructure, right-of-way and government grants and subsidies. For example, First Electric Co-op has more than 4,300 miles of fiber deployed across 18 counties, while EPB in Chattanooga has speeds up to 25 gigabits available for anyone on the network. Many more co-ops are expected to launch broadband and fiber deployment initiatives in the next few years.
• Major fiber providers continued to expand their networks to connect more locations. Regional and specialty fiber providers also expanded their network footprints, including Zayo, Windstream, FiberLight, Arcadian Infracom, Segra and Conterra Networks deploying thousands of miles of middle-mile, regional and purpose-built networks.

Figure 6: Total Inventory vs. Under Construction by Primary Market, H1 2024

Figure 7: Total Inventory vs. Under Construction by Secondary Market, H1 2024

• Adoption and utilization of digital applications will continue to drive data center demand due to more storage, computing and processing of data.
• Power delivery timelines will continue to increase in H2 2024 due to a shortage of readily available equipment, such as transformers, switches and generators. Difficulty in procuring critical equipment will lead to power delivery delays of up to four years.
• Markets such as Northern Indiana, Idaho, Arkansas and Kansas will continue to draw interest from hyperscalers and developers due to land availability and power availability timelines.
• Occupiers will be forced to prelease space between two and four years ahead of completion to meet their future data center requirements.
• We expect increased adoption of fixed wireless and fiber-to-the-home solutions to help provide high-speed connectivity across the U.S.
• The federal funds rate is expected to decrease slightly in H2 2024, which may loosen lending conditions.

• The rise of AI and machine learning is driving significant changes in data centers, including increased use of graphics processing units (GPUs) and liquid cooling to reduce the heat from these more power-intensive applications.
• With carbon emission goals for 2030 rapidly approaching, will improvements in cooling efficiency, recycling waste heat and renewable energy power generation sources become imperative for operators in H2 2024?
• Will mainstream adoption of new applications requiring edge computing occur in H2 2024?
• Will an unexpected event disrupt capital expenditures to improve utility transmission and distribution across the country?
• Semiconductor chips and graphics processor companies continue to grow top-line revenue at an impressive rate. Will hyperscaler capital expenditures continue to grow in tandem with GPU production?
• Will historically low natural gas prices over the past year rise in H2 2024?
• Has public perception of nuclear power improved enough that small modular reactors can be used to power data centers?