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As enterprises expand cloud adoption and AI models gobble up servers, data center capacity has risen to the top of IT’s most pressing concerns..
A CBRE Group report on Monday showed that vacancy rates in the first half of this year hit an all-time low despite a surge in supply and construction activity.
Vacancy rates in three major markets, including Northern Virginia, Silicon Valley and New York, fell to 2.8% from 3.3% a year ago, while supply in these markets increased to 24% from 19% a year ago.
Gordon Dolben, Americas data center research director at CBRE Group, told CIO Dive that the surge in new construction hasn’t eased the constraints.
“Since 2020, we’ve seen a dramatic increase in the number of properties under construction,” Dolvin said, noting that construction activity was up 69% year over year. “The challenge we have is the bottleneck in the schedule to get these facilities electrified and actually operational.”
In the cloud services space, AWS, Microsoft and Google Cloud are competing for enterprise customers, but those same hyperscale providers are also competing for businesses looking to secure valuable data center capacity.
Despite a multibillion-dollar construction boom, data center availability has essentially bottomed out in major markets. In Northern Virginia, CBRE estimates that vacancy rates fell below 1% and availability fell to nearly zero in the first three months of the year, even as inventory grew 18% year over year.
Most or all of the vacancies in major markets reflect customers moving from one space to another, just as job-hopping makes up a large portion of job losses when the unemployment rate falls below 2% or 3%.
“In theory, you could have zero vacancy,” said Pat Lynch, executive managing director and global head of data center solutions at CBRE, “but when vacancy rates drop below 3% or 4%, it’s mostly temporary and few customers are leaving because they have nowhere else to go.”
As cloud providers ramp up high-capacity infrastructure to support AI capabilities, they are consuming inventory even as construction is underway: Research shows that roughly 80% of data center space currently under construction in major markets is already leased.
“It’s fair to say there are even more pre-releases today than there were when the data was collected,” Lynch said.
Northern Virginia’s data congestion
The space shortage has caused prices to skyrocket in some areas: While national costs for colocation and rental space increased an average of just 7% year-over-year through the first six months of 2024, in Northern Virginia prices jumped by as much as 50%.
The region is a bellwether for infrastructure and the world’s largest concentration of computing resources, according to Synergy Research Group, which said in a report Monday that Northern Virginia’s data center hub accounts for 7% of global capacity.
“Northern Virginia is not only a major location for hyperscale data centers, it is also the largest colocation market in the world,” John Dinsdale, chief analyst and research director at SRG, said in an email. “It achieved this by becoming the original epicenter of the world’s internet infrastructure and continues to be a hub for data center deployment.”
As Northern Virginia and other major markets reach capacity limits, other regions are stepping up to fill the gap: Oregon, Iowa and Ohio have surpassed Silicon Valley as providers of hyperscale data center capacity, with Nebraska, Arizona and Southern Virginia trailing behind, according to SRG research.
“Customer proximity is a key driver of the colocation market, so data centers tend to be located in metropolitan areas with high concentrations of businesses and economic activity,” Dinsdale said. “This will continue to be the case, but we are now seeing many metropolitan areas emerge in countries with smaller but faster-growing economies.”
A CBRE analysis of the first half of this year found secondary market construction is picking up, data center vacancy rates are at 9.7% and rents are cheap, but there are trade-offs in latency, security and performance.
“CIOs have different preferences for where and how they process, compute and store their data,” Lynch says. “You don’t always have a choice, but if you can’t find space in Northern Virginia, you might want to consider Atlanta or Columbus.”
With even hyperscalers grappling with capacity constraints, waiting for the pressure to ease is not a sustainable solution.
“Smaller companies, Fortune 100 companies with lesser requirements end up in the secondary space because that’s all they have available,” Lynch said.
Hyperscalers and social media companies are using their cloud clout to buy up huge amounts of inventory long before it’s built.
It will be tough for banks and insurance companies, which only need 2 megawatts in major markets, Lynch said. “The big suppliers are hunting elephants, hoping to hit a third or a home run.”
