Leasing Activity Slows At Bay Area Data Centers, But More Large Deals Expected, JLL Says
Northern California’s data center market remains among the top in the U.S., and more construction will help meet ongoing demand.
Data center construction is up 43% in North America compared to 2016. Mergers and acquisitions accelerated during the first half of 2017, and cloud leasing has begun shifting to global markets, according to a report from JLL.
“While M&A activity is surging, data center leasing has quietly returned to normal in the U.S.,” JLL Managing Director and Data Solutions co-lead Bo Bond said. “The acquisition of large amounts of server space in the U.S. by cloud companies continues, but is no longer as frenetic as it was in 2016.”
Northern California’s leasing activity slowed down to more traditional levels during the first half of 2017 after large users increased absorption rates in 2016 across the region. Vacancy rates in Silicon Valley reached 4.5% at the end of 2016. Over 43 megawatts were under construction with 95% pre-leased, according to CBRE.
During the first half of 2017, about 125K SF (30 megawatts) was under construction with 200K SF (46 megawatts) planned. The market absorbed three net megawatts and rental rates ranged from $125/kilowatt to $200/kilowatt. As the market continues to mature, REIT operators will be less willing to offer concessions, especially with ongoing low vacancy rates, according to JLL.
Barriers to entry are high because of the cost of land and availability. New inventory coming online will help ease the single-digit vacancy rate with new supply coming from CoreSite, Digital Realty and Equinix.
CoreSite is building a campus in Santa Clara. 1547 Critical Systems Realty and CIM Group will break ground on the first data center in San Francisco in 10 years during the fourth quarter, adding another 187K SF and 24 megawatts to the region.
Vantage, which was recently acquired by Digital Bridge, is expanding with 24 megawatts of development expected by the end of 2018. Digital Realty acquired DuPont Fabros Technology in June for $7.6B, expanding its footprint by adding 3M SF and 12 data centers. DuPont owns a 360K SF data center in Santa Clara with a capacity of 36.4 megawatts.
Longstanding tech and cloud providers continue to sustain the Bay Area market while retail providers are leaving because cloud operators are growing their market share. With Chinese telecommunication operators and cloud users looking for lease and acquisition opportunities in the region, JLL expects an increase in deals made through the end of 2017.
In the next two years, data center users expect automation to improve efficiency and make data center operations more valuable. Increased use of artificial intelligence will create better predictive analytics on-site, reduce human involvement in data centers and help cut time to restore operations during a failure. Processor technology investments will help improve cooling and energy usage.
