CBRE: Data Center Vacancy Falls To Record Low Despite Supply Surge
New data centers are being built at a breakneck pace, but Big Tech’s increasingly insatiable appetite for data center capacity to support artificial intelligence and cloud services means new inventory is still being snapped up faster than it can be produced.
And according to a new report from CBRE, that’s not going to change any time soon.
Amid the ongoing data center development boom, data center inventory in primary U.S. markets grew by more than 10% in the first half of this year alone, according to a report CBRE published Wednesday.
But this dramatic increase in supply was more than offset by growing demand from tech giants like Amazon, Microsoft, Google and Meta that continue to prelease the vast majority of new construction years before it is delivered, driving vacancy rates to record lows.
Developers trying to keep pace with this growing wave of demand continue to be stymied by long wait times to receive power from utilities and shortages of critical equipment. These constraints are expected to worsen in the months ahead, according to CBRE — a tightening supply squeeze that will continue to put upward pressure on rents and force tenants to prelease data center space as much as four years in advance.
“The trend has been consistent over the past two years: Demand for data center capacity far exceeds supply, which continues to drive up pricing in a material way,” Pat Lynch, executive managing director and global head of CBRE Data Center Solutions, said in a statement. “Based on the preleasing numbers in this report and forecasts for demand, we expect to see this imbalance continue for several more quarters.”
Compared to almost all other sectors of CRE, data center construction is booming. The 515 megawatts of new capacity that came online in the first half of this year in primary U.S. markets was equivalent to adding the entire data center inventory of Silicon Valley, according to CBRE. That’s a 24% jump in total supply from a year earlier.
Construction pipelines have never been larger, with the 3.9 gigawatts of capacity being built today in major markets representing a 69% increase from a year ago.
Yet this influx of supply hasn't been enough to satisfy rapidly accelerating demand from the world’s largest tech companies, whose ongoing AI arms race has supercharged what was already a robust data center demand landscape driven by the computing needs of traditional cloud services and social media products. These companies plan to spend trillions on AI infrastructure over the next five years, with much of that capital expenditure going toward leasing new data centers capable of supporting energy-intensive AI computing.
Thus, even as the supply of new data centers has shot up, vacancy rates have plummeted across North America. In primary markets, vacancy rates fell to a record low of 2.8%, down from 3.3% a year earlier, according to CBRE.
Secondary markets also saw a steep decline in availability, with vacancy rates dropping from 12.7% to 9.7% year-over-year. The data suggests that little relief is on the horizon. Although there is nearly 4 gigawatts of capacity under construction across major U.S. markets, nearly 80% of that future supply has already been preleased.
Despite a flood of capital looking for opportunities to fund new data center development, the primary culprit responsible for limiting the pace of new development continues to be a lack of developable land with immediate access to the vast amounts of power data centers require.
In all of the top 22 data center markets, projects 30 megawatts and larger now face minimum wait times of 2.5 years for grid connections from regional utilities, which are scrambling to upgrade transmission infrastructure to handle the unanticipated spike in demand from data centers, according to TD Cowen. Major markets like Atlanta, Portland, Sacramento and Silicon Valley have six-year waits, while lead times in Columbus have extended to seven years.
Delays are likely to become more acute in the coming months, according to CBRE. Power delivery timelines will continue to increase through at least the second half of this year, the report’s authors say, with difficulty procuring critical equipment like transformers, switches and generators creating new delays of up to four years. Data centers also face growing competition for power from other large energy users like chip fabrication plants.
“Unfortunately, we do not anticipate these power shortages easing anytime soon,” CBRE’s Lynch said in an email responding to Bisnow. “The confluence of onshoring, semiconductor fabrication manufacturing plants and data centers are increasing load demands, as well as increasing expansion capability of the grid.”
These development hurdles will continue to indirectly impact data center tenants as well, not least by driving rents steadily upward by exacerbating the supply-demand imbalance.
Tenants are also being forced to prelease new construction well ahead of its delivery in order to have any chance of securing the capacity necessary to execute their AI or cloud growth strategies. According to CBRE, the coming months will see occupiers forced to prelease space farther in advance than ever, with future development going under contract between two and four years ahead of completion.
“Previously, it was common for preleasing to occur 12 to 24 months before project completion,” Lynch said. “However, we are now seeing preleasing activity extend to 24 to 36 months, and in some cases, even up to four years in advance.”
