CBRE: Demand for data centers by financial services sector remains robust

The good news: The New York/New Jersey tri-state was one of the top markets for data center leasing activity during the first half of 2022, according to CBRE’s North America Data Center Trends report.

As a result of robust activity and strong demand, CBRE said the vacancy rate fell to an all-time low of 9% in the first six months of the year.

Bill Hassan of CBRE’s Data Centers Solutions Group said the area is trending.

“The financial services sector remained the dominant player in the market’s leasing activity, which helped net absorption reach 16 MW in the first half of the year,” he said. “To meet the robust demand, major data center operators are adding supply at a rapid pace. In fact, under-construction activity hit a 10-year high of 67 MW in H1 2022.”

According to CBRE’s report, 67 megawatts of new construction is underway, with notable activity in the New York tri-state area including DataBank’s new 30 MW facility under development in Orangeburg, New York, at a site sold through CBRE; QTS’ 9 MW data center under construction in East Windsor; and several facilities throughout the region being developed by Sabey, Digital Realty and CoreSite.

CBRE’s Jon Meisel said the potential is there.

“Hyperscalers that can provide a distributed computing environment for up to thousands of servers are beginning to look for capacity throughout the region,” he said. “To meet this demand, the major third-party providers as well as the large cloud providers are looking for redevelopments near robust power in this very constrained market.”

The not-as-great news: The region still has a long way to go match the nation’s top markets.

Northern Virginia was by far the leader, with 269.3 MW of net absorption, followed by Dallas and Silicon Valley. The New York/New Jersey area ranked No. 6 overall.

CBRE’s latest North American Data Center Trends Report found that 352.9 MW of new supply went online in the seven primary U.S. data center markets in the first half of 2022, a 20% increase year-over-year.

Despite the influx of additional capacity, data center vacancy decreased to an average of 3.8% across the seven primary markets in H1 2022 — down from 10.3% in H1 2021 — as large cloud users raced to secure space to accommodate anticipated future growth.

Significant preleasing of space under construction in prior years also contributed to the large drop in vacancy. For the first time since 2017, tight market conditions caused average asking rents to increase in both primary markets (5.9%, to $127.50 per kilowatt) and secondary markets (2.3%, to $133 per kW). Primary-market vacancy will remain tight for the foreseeable future, as 73% (1,170 MW) of the 1,601.5 MW of the under-construction supply was preleased as of the end of H1 2022.

Pat Lynch, executive managing director, global head of advisory & transaction services, Data Center Solutions at CBRE, said rents figure to continue to rise.

“Supply chain disruptions and a lack of available power and land in some major markets could delay new construction deliveries over the balance of the year and beyond,” he said. “As a result, we expect continued rising rents nationally, and more occupiers turning to secondary and tertiary markets to meet their needs.

“These smaller markets will also continue to benefit from an increase in edge data center deployments, driven by broader adoption of AI, 5G and blockchain technologies.”