Data Center Drought: A Thirst For Space In A Desert Of Supply

The booming artificial intelligence (AI) industry has propelled North American data center construction to an all-time high, according to a report from commercial real estate firm CBRE.

CBRE's North American Data Center Trends report found that 2,287.6 megawatts (MW) of data center supply is under construction in primary markets, with 70% of it already preleased. That's up from 1,830.3 MW under construction at the same time last year.

"Data center construction is at an all-time high, driven by strong demand from all users, including AI, hyperscale and enterprise," said Pat Lynch, executive managing director for CBRE's Data Centers Solution. "New and existing uses of artificial intelligence cases grew tremendously in the first half of the year, and we expect demand to remain strong with AI driving leasing opportunities in the second half of the year."

Lenders continue to fund projects under construction, particularly for preleased and stable assets where developers and operators are dedicated to adhering to completion schedules to meet the promised lease start dates. Both data center providers and customers are acquiring land in strategic markets, intensifying competition for properties that align with established power and fiber requirements because of the scarcity of suitable sites.

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But vacant and second-generation enterprise data center acquisitions are difficult to underwrite. Purpose-built facilities that didn't take into consideration second-generation market appeal are trading at a significant discount-to-replacement cost.

Top 10 Most Active Markets

Market	H1 2023 total inventory	H1 2023 under construction
Northern Virginia	2,254.1 MW	918 MW
Hillsboro, Oregon	248.4 MW	267.3 MW
Silicon Valley	410.7 MW	125 MW
Chicago	367.5 MW	205 MW
Dallas-Fort Worth	499.4 MW	273.3 MW
Phoenix	360 MW	163.5 MW
Toronto	291.3 MW	99.6 MW
New York Tri-State	177.5 MW	99.9 MW
Atlanta	271 MW	235.6 MW
Montreal	135.5 MW	106.5 MW

Source: CBRE

The overall vacancy rate for primary markets is near a record low at 3.3%. Northern Virginia's vacancy rate is 0.94%, the lowest of all U.S. markets.

"Most major markets are grappling with power constraints, and developers are facing challenges within their supply chain, but it's not slowing down the demand for data center space," said Gordon Dolven, director of Americas Data Center Research at CBRE. "Data center operators are prioritizing power availability rather than selecting markets based on traditional factors such as location, connectivity, water and land pricing."

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