Rents Soar 20% In Largest U.S. Data Center Markets

Operating costs for data center tenants have jumped dramatically this year as the industry’s power problems grow.

Data center rents and power costs have surged since last year in many of the most important hubs, according to a CBRE report. Average rents in the four largest North American markets increased 20% year-over-year, CBRE found. 

These rising costs have been felt most acutely in Northern Virginia, the world’s largest data center market, where first-quarter colocation rents soared 41.6% and power prices jumped 20.8% year-over-year. 

Rents in Chicago climbed 33%, while rents in Dallas and Silicon Valley also saw marked increases. 

At the root of these higher costs for tenants is the industry’s ballooning electricity needs, which are straining regional power grids and creating a bottleneck that is slowing the development of new data centers amid a record wave of demand. 

“Behind the increase in pricing is just a dramatic demand wave that we have not seen any sort of pullback in,” said Gordon Dolven, CBRE director of Americas data center research and one of the authors of the report. “Supply is so constrained and demand remains resilient, so I don't see much changing in the next few quarters.”

CBRE’s data looks only at agreements for between 250 kilowatts and 500 kilowatts of capacity — relatively small colocation deployments compared to the massive leases from major tech firms that account for the bulk of new leasing activity.

Still, CBRE Vice Chairman Rob Faktorow said hyperscale rates are on the rise as well, even if that growth is a bit more tempered. In Northern Virginia, hyperscale deals saw pricing up between 15% and 20%, Faktorow said.  

The cost of power is also trending upward across most primary data center hubs, although there is significant variability between markets.

While experts caution that the price increases appear most dramatic in Northern Virginia and other cheap-power markets, industry hotbeds like Chicago, Dallas, Phoenix and Atlanta have all seen electricity prices shift steadily northward since early 2022, according to CBRE data.

Tenants' rising rents and power costs come as developers scramble to build new data centers to meet an unprecedented wave of demand led by major cloud providers and social media giants like Amazon, Microsoft, Google and Meta, a trend that is only expected to accelerate as these companies invest billions in artificial intelligence. 

At the same time, the massive amount of electricity used by data centers is already straining transmission systems in every major market, resulting in a dwindling supply of developable land where utilities can deliver power as quickly as data center providers and their tenants need it. Wait times for new grid connections from utilities are now routinely as long as five to seven years in key hubs like Northern Virginia and Columbus, Ohio.

This supply-demand imbalance is the primary factor driving up rents, according to CBRE. While the past two years have seen accelerating growth of cheaper secondary and tertiary markets, tenants have demonstrated a willingness to accept higher prices for whatever capacity becomes available in traditional digital infrastructure hubs that offer low latency, or faster data transfer times to other data centers or major population centers.

Surging energy demand from data center development is also contributing to the rising cost of power in some markets, with utilities and grid operators launching substantial transmission infrastructure projects to connect a growing wave of proposed data centers. As Bisnow reported previously, power providers in places like Ohio and North Carolina are trying to ensure data center firms pay a larger share of these grid upgrades, announcing new electricity supply contract terms specifically for data centers. 

But it isn't just supply and demand pushing up costs for tenants, Faktorow said. 

Data centers are becoming more expensive to build, with the cost of land, labor and equipment all on the rise. At the same time, projects face growing uncertainty around power delivery and continued supply chain volatility that threatens development timelines. Together, this amounts to significant risk for developers and the capital providers underwriting data center projects. That risk has investors demanding higher returns, putting upward pressure on rents.  

“It's a complicated process to build, deliver and operate these buildings, and the risks associated with that are high,” Faktorow said. “The capital that's attracted to the industry has the opportunity to be selective as to where they make their investments, and there is now a view towards making certain that the returns on those investments are commensurate with the risk.”