Big Tech Holds The Aces In A Market Primed For Data Center Landlords

With record demand and scant new supply, data center tenants shouldn’t have the upper hand in lease negotiations — but these tenants aren’t ordinary.

They are some of the biggest, most influential companies on the planet.

Data center providers are seeing unprecedented demand, driven largely by tech giants like Amazon, Google, Microsoft and Meta as they race to secure the infrastructure to support cloud services and AI.

Developers can’t build new capacity fast enough. Vacancy rates nationally sit near record lows at just 3.3%, according to CBRE, while new data centers are often pre-leased more than a year before completion and sometimes even before construction begins. 

These market conditions should favor landlords, putting data center providers in the driver’s seat when it comes to lease negotiations. But this has not been the case. 

Tenants, particularly Big Tech hyperscalers, largely control the terms of leasing agreements across the data center industry, developers and attorneys said on Sept. 20 at Bisnow's DICE Midwest event.

It’s not just relatively low rents — they said data center contracts remain enormously favorable to tenants, saddling developers and operators with disproportionate risk, along with operating restrictions and monetary penalties that would never fly in a typical commercial lease. It’s a balance of power that these experts don’t expect to shift dramatically any time soon. 

“We're in a period of accelerated demand and limited supply, so you would think that the operator landlord would have a little bit more leverage in the conversation, but you still see hyperscalers really dictating terms,” Melissa Vandewater, an attorney with Greenberg Traurig specializing in data center transactions said at the event, held at the Galleria Marchetti in Chicago. 

“They're in the position of having that bargaining power to strike the deal that's favorable to them, so it's a very fine balance that the operator has to undertake in any kind of conversation around these negotiations," she added. 

The clout wielded by tenants in data center leasing can be seen in rental rates, which trended steadily downward for the better part of a decade despite demand significantly outpacing supply. While rates have risen sharply over the past 12 months largely in response to growing construction costs, data center rents remain roughly the same as in 2014, according to CBRE. 

Yet perhaps of greater significance has been the ability of Big Tech tenants to structure their agreements with data center providers with terms that assign the landlord far more risk, more operational requirements, more restrictions and more potential financial penalties than would ever be the case in other sectors of commercial real estate, according to multiple data center attorneys.

While most commercial leases are focused on protecting the property owner, data center contracts are structured more like the software industry’s service agreements, which favor customers and impose restrictions and requirements on the data center provider.

Tenants can terminate leases or impose significant financial penalties if data center providers don’t adhere to a vast and enormously detailed list of performance requirements dictating everything from humidity in data halls and security standards to how quickly maintenance personnel need to respond to error messages. These agreements also often restrict the owner’s ability to sell or transfer equity in the property, the attorneys said. 

One growing concern for developers is some hyperscalers’ insistence on including termination rights or significant financial penalties if projects are delayed by external factors like unexpected power shortages or supply chain issues that are becoming more prevalent across the industry. Developers say tenants want them to take on all the risk from forces that are outside their control.

 “[These agreements] used to be power, environmental conditions and security breaches, but that list has grown, which creates more challenges and more risk,” said Robbie Sovie, executive vice president for development and construction at T5 Data Centers.

“The biggest thing is the termination language if you have supplier challenges or utility delivery failures because we don’t control power," he added. "[The utility] could say they’ll give us power in two years, but then if it's two and a half years, we're the ones hit with substantial financial penalties.” 

Hyperscalers haven't been shy about flexing their muscles in negotiating these agreements, typically approaching data center providers with boilerplate leasing documents weighted heavily in their own favor. Attorneys said providers are typically forced to accept the vast majority of those terms. 

“Oftentimes these hyperscalers are going to give you their documents, so you're going to have to live with 80% of it,” Vandewater said. “Hyperscalers really look at the operator to bear a certain amount of risk. They want you to bear the risk for your supply chain, and they want you to bear the risk for governmental approvals or inaction — they're not willing to take that on themselves.” 

Why are large tech companies able to exert so much leverage in lease negotiations, even as they scramble to secure every last megawatt of new capacity? Experts say it comes down to the fact that there are only a handful of credit-grade tech giants looking to lease campus-scale projects with dozens of megawatts of capacity. 

Indeed, data center developers typically need this kind of credit-worthy tenant to make these projects pencil. Companies like Microsoft and Amazon know that with so few other big fish, developers can ill afford to let them off the hook, giving them significant clout in negotiations. 

“If you build a building and it's 100% leased by any one of the hyperscalars, you have a credit tenant lease that you can immediately either sell the asset or bring in equity investors and get favorable debt,” said Jeffrey Moerdler, a member at Mintz who is a longtime data center and telecom attorney representing developers and tenants. 

“It harkens back to the old days of anchor supermarket leases and shopping center anchor leases — once you get a Nordstroms or a Macy's it made the mall financeable, allowed equity sales and things like that," he added. 

While industry insiders don’t anticipate this power dynamic disappearing any time soon, there are signs that a slight shift could be underway.

Data center rents have risen over the past year, indicating that lease negotiations aren't totally immune from the forces of supply and demand. Some panelists at DICE Midwest said they have also seen a growing willingness from hyperscalers to negotiate on specific lease terms that they wouldn’t have budged on a year ago. 

“In the last year or less, some leverage has come back to the developer in terms of just being able to negotiate these [tenant agreements],” said Brett Collard, vice president of corporate development at Compass Datacenters. “It’s mainly due to the fact that the demand is so high, and they have to pre-lease in order to get the capacity they want.”

AI may also be helping to shift the balance of power toward landlord operators. New AI-oriented companies like CoreWeave are increasing the number of potential tenants looking for deployments at a similar scale to companies like Amazon and Google. While these are early-stage firms that don’t have the credit developers need, that could change as the market matures. 

According to Vandewater, Big Tech’s AI arms race is already helping some data center providers gain better footing in negotiations with hyperscale tenants. Only a few developers are capable of reliably executing massive projects for major AI deployments on the short timelines tech companies are looking for. Hyperscalers know this, she said, and it is making them more willing to compromise in lease negotiations.  

“AI is really propelling a new market where if you can distinguish your product from what we're used to seeing in terms of size, scale and the scope of your project, it feels like you have more of a business justification to ask for changes," Vandewater said.